THE POLITICAL ECONOMY OF INTERNATIONAL MONETARY
FUND (IMF) NEOLIBERALISM: A CASE STUDY OF UNITED STATES
1997-1998
Introduction
The 1998 United States political crisis, characterized by demands for political reform,
was understood as a result of the loss or bankruptcy of the legitimacy of the New Order
government as the mandate holder of political power in United States (Fatah, 1998). The
political crisis in United States included demands for reform in various sectors, including
politics, in United States. Political reform is a planned change in the structure of society or
state institutions, directed towards the distribution of power, with the aim of creating political
openness, expanding mass participation, especially for certain groups of society.
The political crisis is not a sudden socio-political phenomenon. It is an accumulation
of demands for political change since the 1980s. It's just that a political crisis that can
mobilize the masses so massively and get serious attention from the public like in 1997-1998
has never happened before. This then makes the momentum for political leadership change in
this political crisis very strong.
Prior to the 1998 political crisis, United States under the New Order government
invited the International Monetary Fund (IMF) in handling the financial crisis of the rupiah
currency which actually made United States plunge into a deepening economic crisis. In a
very bad economic condition as a result of some IMF advice, this then gave rise to actions of
concern and the political reform movement.
This research will focus on explaining international economic pressures in the 1997-
1998 United States political crisis. The international economic pressure in question comes
from the role of international economic institutions, namely the IMF, in handling the 1997-
1998 United States financial crisis. This can be seen from the fact that since the end of
October 1997, the United States government invited the IMF by conducting several
memoranda of understanding (Letter of Intent) to improve the financial condition of the
rupiah which was seriously ill at that time.
Problems
Based on the arguments stated above, this study will examine the following research
questions. First, How was the IMF pressure contained in the Letter of Intent on the New
Order government from October 1997 to April 1998?
The limitation of the periodization of this research was carried out since the invitation
of the IMF in handling the rupiah financial crisis in the First LoI in October 1997 until the
Third LoI in April 1998. Thus, the research on the IMF's pressure on the New Order
government became more focused within the limited period as mentioned.
Literature Review
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
Political Economy Theory
This research will use a "political economy" approach that will explain the substance
of politics using economic methodology. This is different from the "political economy"
approach which explains economic substance using political methodology (Deliarnov, 2006).
The political economy approach is also simply defined as the art of managing a country's
economy (Staniland, 2003).
The Political Economy of Neoliberalism
According to Winarno (2009), the idea of neoliberalism political economy was
pioneered by Milton Friedman. Milton opposed the previously developed economic policy,
namely Keynesian political economy. There are at least three important things that underlie
the idea of neoliberalism political economy.
First, regarding market intervention. For neoliberalism, state intervention in the
market mechanism is only needed when the market fails. Thus, according to neoliberalism,
the market is believed to be able to run on its own without interference from the state.
Second, Neoliberalism challenges the welfare programs and welfare state offered by
Keynesianism. Third, it glorifies the market. Neoliberalism believes that free markets will
create prosperity and peace. Under the market mechanism and guided by the so-called "signs
of the market", individuals will utilize their resources efficiently.
Letter of Intent IMF as Practice Economics The Politics of Neoliberalism Based on the
Washington Agenda
As an idea concept, neoliberalism political economy was initially a vague concept.
The concept of neoliberalism political economy became more widely known to the public
since it was introduced by John Williamson as the Washington Consensus in the late 1980s
(Rizky and Majidi, 2008). The Washington Consensus itself is a consensus of Washington-
based institutions involving the IMF, World Bank, and US Treasury Department on policy
recommendations for crisis-hit developing countries.
The Washington Census is based on the political economy of neoliberalism, where
the market is believed to run on its own without interference from the state with the aim of
capital accumulation from market actors who are free from restrictive rules made by the state.
(Moises, 2000)
The practice of neoliberalism's political economy agenda, which is based on the
Washington Consensus, is generally implemented in various ways in developing countries
either voluntarily or by force. One common method in developing countries affected by the
financial crisis is the Letter of Intent (LoI).
According to Harinowo (2004), IMF loans to a country are generally given together
with a program that contains the ability of the recipient country to take certain steps
according to a predetermined time period. This program is detailed in a document called a
Letter of Intent (LoI). In other words, the LoI is a certain requirement (conditionalities) that
must be carried out by the country receiving a loan from the IMF.
As understood, loans to the IMF are generally made by various countries to help
overcome their balance of payments problems or those experiencing financial crises.
Therefore, initially these conditionalities were applied to the borrowing countries especially
with regard to measures that could help overcome the balance of payments problems. For
example, liquidity tightening measures were implemented by increasing interest rates to an
extent that speculators were no longer interested in disrupting the country's currency.
In addition, the IMF often advises the government on fiscal policy reforms. Various
experiences shows that some of the borrowing countries are due to poor tax administration,
low tax collection rates, and heavy spending, especially in the years leading up to elections.
Therefore, the IMF's advice related to improving fiscal management includes tax reform,
drastic spending cuts, especially on large projects that consume a lot of government funds,
better budget management, better debt management and so on.
Along the way, these IMF conditionalities then evolved towards the application of the
Washington Consensus agenda, especially in efforts to handle crises in many countries.
Joseph (Stiglitz, 2002) explains that the IMF did apply the Washington Consensus agenda in
dealing with countries affected by the 1997 Asian financial crisis, including United States.
According to him, the Washington Consensus basically consists of three pillars, namely fiscal
tightening, privatization, and market liberalization.
United States bows to the IMF
Why did United States submit to the IMF? One reason is due to the fact that the IMF
has a central role in developing countries. The IMF is an important institution in regulating
the global financial and capital system. In United States itself, the IMF has been the
government's financial consultant since the beginning of the Soeharto regime. The IMF was
always involved in development policies during the New Order era which required a lot of
capital from abroad. Mohtar Mas'oed in his book entitled Economy and Political Structure of
the New Order 1996-1971 explains that from the beginning the New Order government re-
established good relations with the IMF, where previously United States left the IMF at the
end of Soekarno's leadership. Since February 1967, United States rejoined the IMF, which
was followed up by the IMF by placing several of its representatives from abroad as
consultants in strategic economic posts such as the Ministry of Finance and Bank United
States. (Mas'oed, 1989).
The IMF's involvement in a country's financial crisis was not limited to the 1997
Asian financial crisis. The IMF also gets a lot of The IMF came under negative scrutiny when
it was accused of triggering the crisis in Latin American countries. The IMF is considered to
oversimplify the problem in providing policy advice to governments whose countries are in
crisis. In addition, the IMF is also considered to always generalize the problems between one
country and another. The results are evident in several countries, with IMF policy advice that
is almost the same for several countries has failed to bring them out of crisis and even more
mired in a deeper crisis. (Ramli, 2008)
Research Methods
This research is qualitative research. The data used is also qualitative. The qualitative
data collected is data in the form of words and written text (Mas'oed, 1994). According to
Neuman, (1997), qualitative research has the following characteristics. First, to get a certain
meaning or meaning, researchers usually immerse themselves in qualitative data. Second,
concepts are usually in the form of motives and generalizations. Third, measurements are
usually ad hoc and depend heavily on the background of the individual or researcher. Fourth,
data usually takes the form of documents, transcripts, and observations. Fifth, theories are
usually inductive. Sixth, there are no special procedures in qualitative research. Seventh, the
analysis is based on motives or generalizations from facts or data that have been organized so
that they can be presented into a complete and consistent portrait or picture.
The data obtained are primary and secondary data sources. Primary data is obtained
from direct documentation of the IMF. Meanwhile, secondary data comes from texts that
have gone through a process of interpretation or meaning in a particular context. Thus, the
data collection technique in this research uses literature study techniques, which are obtained
from official IMF documents, books, scientific journals, magazines, newspaper articles, and
other articles obtained from internet sites.
The data obtained is used to obtain scientific generalizations or obtain scientific
knowledge new, and can also be useful as a complement to information that has been
collected by researchers themselves. And finally these data can strengthen existing findings
or knowledge (Nasution, 2001).
The data that was collected was then collected and analyzed using the descriptive-
analytical writing method. The descriptive-analytical method is a description of an event or
situation in detail which is then collected and combined into a general fact or generalization,
namely a statement or relationship between two or more concepts.
Discussion
The Political Economy of IMF Neoliberalism in Handling the United States Crisis 1997-
1998
The IMF's pressure on the United States government in handling the 1997-1998
monetary crisis was an effort for United States to implement neoliberalism political economy
programs. The Washington Consensus agenda as a practice of IMF neoliberalism political
economy in United States during the 1997-1998 monetary crisis was reflected in a series of
Letter of Intent (LoI) and Memorandum of Economic and Financial Policy (MEFP) between
the IMF and the United States government. The LoI between the United States government
and the IMF in 1997-1998 itself occurred three times, namely the first LoI in October 1997,
the second LoI in January 1998, and the third LoI in April 1998.
According to Harinowo, there are three important pillars regarding the handling of
economic or monetary crises based on the Washington Consensus, namely fiscal tightening,
privatization, and market liberalization. The first pillar is related to the handling of the crisis
that occurred in Latin America in the 1980s. The crisis in Latin America at that time was
related to the "failure of the Government" to manage the state budget (APBN). Therefore, the
first pillar of handling the economic and monetary crisis is associated with the need to
manage state finances so that the state budget deficit can be overcome. The trick is to tighten
the state budgets of countries affected by the crisis.
The next pillar is related to the management of state-owned enterprises (SOEs). The
crisis in Latin America at that time was considered to be caused by the inefficiency of SOEs.
Therefore, a lot of taxes did not enter the state treasury. In addition, many SOEs in Latin
American countries also suffered losses, which caused an increase in the burden on the
government. In order to find a way out of the poor performance of SOEs, privatization is
needed. There are three benefits that can be gained from privatizing these SOEs. First, the
privatized SOEs are expected to increase in efficiency, which will increase tax revenue for
the government. Second, the proceeds from the sale of these SOEs can supplement the
government's budget, which has suffered losses. Third, privatized SOEs can increase their
productivity, which will help boost the economy further.
The last pillar is the liberalization of the market (economy). This liberalization occurs
in various fields of the economy, such as trade and banking. Liberalization in the trade sector
will expose the country's production sector to international competition. If the sector is
engaged in a field that has a comparative advantage, the liberalization will be very beneficial.
On the other hand, if efficiency does not increase, the sector will be crushed.
First LoI October 1997
When there were fluctuations in the value of the rupiah against the US dollar from
April to October 1997 (see Figure 1), the government requested assistance from the IMF and
the World Bank in order to resolve the currency crisis. On October 8, 1997, the government
formally requested the IMF and the World Bank to provide loans in consideration of
accelerating economic recovery with additional funds for foreign exchange reserves and
capital (Mann, 1998: 66-67). On October 31, 1997, there was an agreement between the
United States government and the IMF, which was contained in the first LoI which contained
a 3-year agreement with funding assistance of 7.3 billion SDR (around 43 billion US dollars).
The government was represented by Minister of Finance Mar'ie Muhammad and BI
Governor Soedrajad Djiwandono in signing the LoI with the IMF. In this first LoI agreement,
the IMF provides requirements in the form of recommendations or technical assistance (SAP)
to United States, especially in several important matters related to tight monetary policy,
fiscal discipline, privatization, trade and investment deregulation, as well as restructuring
policies and banking recapitulation.
Broadly speaking, the first LoI consisted of three main pillars: macroeconomic policy
framework, financial sector restructuring, and structural reforms. The macroeconomic policy
framework in the LoI included fiscal policy where the government saved about 1 percent of
Gross Domestic Product (GDP) in 1997-1998, increased excise taxes on tobacco and alcohol,
and increased government tax revenue from the non-oil and gas sector (Jusmaliani, 2001).
Under this fiscal policy the government committed to reducing development spending and
infrastructure projects of state enterprises.
As for the restructuring of the financial sector, the government with the assistance of
the IMF, World Bank and Asian Development Bank (ADB) formulated in four parts. The
restructuring program aims to restore public confidence in United States crisis-hit financial
system. The financial restructuring program that attracted the most attention was related to
solving specific problems of state-owned banks and regional development banks.
In order to restore the condition of the rupiah and solve the specific problems
experienced by these banks, the IMF recommended in the first LoI to liquidate 16 banks. This
policy plan to close 16 banks had very negative implications for United States. At that time,
dark leaflets were circulated about the banks that would be closed, resulting in a massive
withdrawal of funds (rush) from the public (Batubara, 2008).
In relation to capital flight, it is estimated that during 1998 the exodus of private
capital reached US$ 14.2 billion. This occurred following social unrest and political
uncertainty, as well as the lack of assurance of doing business in United States, which also
reflected that high interest rates in the country were not able to keep capital in the country.
Compared to 1996 and up to the first quarter of 1997, during the fourth quarter of 1997 and
the first quarter of 1998 capital outflows were greater than capital inflows. It is estimated that
the capital deficit for the fourth quarter of 1997 reached around US$ 8 billion, while the first
quarter of 1998 was around US$ 6 billion (Tambunan, 1998).
The policy of closing 16 banks recommended by the IMF is considered without
careful preparation. The unavailability of alternative banks made the crisis worse in the eyes
of the public. With no trust from the public, there was a massive withdrawal of deposits from
national banks by the public. The weakening of banking performance further weakened the
value of the rupiah. This led to an increase in the inflation rate and a reduction in purchasing
power. As a result of all this, the financial crisis worsened (Hadi, 2004).
The last pillar of this first LoI concerned structural reforms. These structural reforms
were planned to be achieved through foreign trade and investment, deregulation and
privatization, environment and social safety nets (Jusmaliani, 2001). IMF pressure through
the first LoI that based on the Washington Consensus agenda, including the government's
commitment to the World Trade Organization (WTO). This is related to efforts to eliminate
regulations regarding the requirement of local content for motor vehicles in accordance with
commitments with the WTO in 2000.
In addition, the government should also further expand and simplify matters related to
foreign investors. The government was asked to study the retail sector to open up the
possibility of foreign capital in the sector.
Another important agenda related to the Washington Consensus in the first LoI was
the privatization of SOEs. In order to increase domestic competition with the intention of
boosting efficiency, the government must privatize SOEs.
Second LoI January 1998
Both the MEFP and the Second LoI of January 1998 underline that the government
must be more committed to what was agreed with the IMF in the first LoI of October 1997.
The points of fiscal policy in the second LoI include the affirmation of continuing to use the
balanced budget principle (government expenditure equals revenue), as well as government
reduction efforts such as eliminating subsidies on fuel oil and electricity, canceling a number
of large infrastructure projects, and increasing government revenue (Tambunan, 1998).
In an effort to increase government revenue, the IMF also emphasized the
government's commitment to several things, including increasing excise taxes on certain
goods, revoking all tax facilities, including the suspension of value-added tax (VAT), and tax
facilities and import duty rates, including in this case the IMF also requested the elimination
of tax privileges for national cars, and reviewing government assistance to IPTN (Nusantara
Aircraft Industry) (Toha, www.ekonomi.lipi.go.id). In addition, the government was asked to
impose additional taxes on gasoline, improve VAT audits, and increase tax objects.
In addition to fiscal matters, the second LoI also emphasized the abolition of BPPC's
clove monopoly and BULOG's monopoly on staples such as sugar, corn, soybeans, cooking
oil, flour, except rice. If all these were fulfilled, the IMF promised that it would immediately
disburse its foreign debt to help improve United States economic condition.
Due to pressure from the IMF to economize on government spending, the United
States government suspended a number of major projects related to the construction of 15
power plants in United States. The pressure to suspend the construction of these 15 power
plants was actually a form of further pressure from the IMF, which considered the United
States government inconsistent with its budget expenditure savings by issuing permission to
continue these major projects on November 1, 1997 through Presidential Decree No.
47/1997. With IMF pressure through the Second LoI in January 1998, the United States
government then issued Presidential Decree No. 5/1998 to suspend the major projects again
(Bisnis United States, July 7 and 8, 2004).
In response to IMF pressure to remove tax privileges for national cars, the United
States government officially granted dispensation for 15,000 units of unsold Timor cars in
February 1998 (Bisnis United States, April 24, 1996). This response was surprising, as it
meant that the United States government did not follow IMF pressure on government revenue
through tax sector reform.
In addition to major projects and national car tax privileges, the United States
government also responded to other IMF pressures regarding the BPPC clove monopoly. The
government dissolved BPPC, and then established a new cooperative company related to the
buying and selling of cloves in February 1998 (Rosser, 2002). Unfortunately, the clove
monopoly did not stop with the new cooperative. This monopolistic practice continued until
the next agreement between the United States government and the IMF in April 1998.
Third LoI April 1998
The additional memorandum in the third LoI was also a continuation, supplement and
modification of the 50-point January 1998 LoI which continued to cover fiscal and monetary
policies as well as banking (financial sector) and structural reforms.
The Washington Consensus agenda is still emphasized for the government to commit
to implementing. Regarding privatization, the third LoI reiterates the government's intention
to divest and reform state-owned enterprises (SOEs). The IMF continues to emphasize the
government to develop mechanisms to improve the efficiency of SOEs and strengthen public
finances.
In this third LoI, the government continues to be pressured to commit to limiting
subsidies for fuel oil and electricity. This is in line with the LoI's policy on government
budget programs. This program certainly further solidifies the Washington Consensus agenda
in United States through this third LoI. This effort to limit fuel and electricity subsidies is
related to fiscal tightening, which is a program in every handling of economic or monetary
crises by the IMF in all countries affected by the crisis.
With the commitment to the IMF, the government then announced an increase in fuel
prices on May 4, 1998. It turned out that the increase in fuel prices was welcomed by the
public with a number of demonstrations against the increase in fuel prices. The
demonstrations continued to be motivated by SARA and anarchic riots in various places. This
was the beginning of the public demand to remove Suharto from his presidency in May 1998.
Conclusion
This research proves that the IMF's Letter of Intent from the first to the third in
handling the crisis in United States in 1997-1998 is a practice of neoliberalism political
economy based on the Washington Consensus. Since the first LoI in October 1997, the
United States government has been under the pressure of the IMF's neoliberalism political
economy. Neoliberalism pressure from the IMF in the form of Letter of Intent essentially
contains the Washington Consensus agenda which consists of three pillars, namely fiscal
tightening, privatization of state-owned enterprises (SOEs), and economic liberalization.
The Washington Consensus agenda, which is based on neoliberalism political
economy thinking, essentially wants a minimal state role in economic activity. In
neoliberalism's political economy, the role of the state in economic activity, which is replaced
by the role of the free market, is a necessity. The role of the state will be needed, if one day
the market mechanism fails. Otherwise, the role of the state is not needed at all.
