James Castle, Jakarta – For anyone involved in business or policy in developing Asia, the boom and bust of the 1990s are the defining events of the last twenty years. A decade has passed since the floating of the Thai Baht on July 2, 1997 precipitated a series of currency devaluations and other financial catastrophes that are now collectively known as "The Asian Crisis".

Indonesia was the worst hit of the five crisis countries – Thailand, the Philippines, Malaysia and South Korea – so it is appropriate to revisit events of the time in an effort to understand why it was so much more severe here.

While there remains much lively argument over the relative weights that should be assigned to various factors identified as causes of the crisis, many agree the most important factors were loose credit conditions and fixed exchange rates that encouraged risky short term foreign currency borrowing to fund long term domestic fixed asset acquisition. But this applied to all of the crisis-hit countries to greater or lesser degrees. And in this regard, Indonesia was far from the worst offender. If so, why was our fate so much worse? What was so different here?

The answer to this most important question is to be found in the crony-capitalism that was at the heart of the New Order system. While it admittedly generated nearly three decades of unprecedented growth, it also contained at its core, fundamental abuses that made a serious financial crisis all but inevitable.

While excessive concentration of ownership existed in the other crisis countries, the modern business sector was much more concentrated in Indonesia. And the situation here was even more dangerous because of the emergence in the late 1980's of a truly untouchable clique of rent-seekers more powerful and protected than all the other cronies combined. This was the Soeharto family clique.

President Soeharto was trapped in the unhappy position that dramatic changes were needed to stabilize the economy yet these changes threatened the very heart of the personal financial empires of his children. Virtually all technical advice aimed at avoiding crisis or mitigating its impact pointed in this direction and therefore became immediately suspect and unacceptable. While it is possible to imagine a ruthless Soeharto sacrificing any or all of the large crony conglomerates to save his government and his legacy, he could never sacrifice his family.

Indonesia was caught in a perfect storm in 1997. It had an aging and increasingly isolated leader who was a victim of both the demand for change that came from his own policy successes and the financial excesses of his selfish and undisciplined children.

Indonesia's rigid authoritarian system that had worked so well for 30 years and brought so much economic progress had become increasingly brittle as Soeharto listened less and less to the external advisors who had served him so well for so long and more and more to his immediate family and their sycophants, desperate to protect their short term financial interests and preserve their privileged position atop Southeast Asia's richest economy.

One of the enduring images of the crisis is the photo of a grim-faced Michael Camdessus, Managing Director of the IMF, standing with arms crossed as the seated Soeharto signs the acceptance of the latest list of IMF demands. The photo was to quickly become an iconic symbol of Soeharto's humiliation and, by extension, the humiliation of all Indonesians, even those who wished Soeharto gone.

The irony of the photo is that in other affected countries finance ministers, not the heads of state, signed similar IMF documents. But at the time of this signing Soeharto no longer trusted his financial ministers whose advice now always ran against family interests and presented politically dangerous challenges to his iron rule. So in a colossal lapse of judgment – the kind a younger, healthier Soeharto never made – he signed the documents personally, at a stroke bringing humiliation upon himself and his country.

Protecting his children was synonymous with protecting his system. Unfortunately, the system he struggled to protect was one that, according to the IMF and others, had concentrated more than half of the modern domestic corporate structure in the hands of perhaps no more than ten families, including Soeharto's own. Such a structure meant that risks were poorly diversified and regulatory and corporate governance weaknesses were compounded.

Virtually all of these privileged cronies owned banks that had related-party lending far in excess of regulatory limits. Post-crisis analysis has shown that about half of the lending of failed banks that had to be taken over by the government was intra-group, a devastating regulatory failure.

The underlying weaknesses in the corporate sector and the flaws in the financial system upon which the crony capitalists relied caused Soeharto's fatal blunder, the mismanagement of 1998 liquidity support credits that were intended to assist healthy national banks suffering from liquidity problems.

Most of the liquidity injections went to banks that were far from healthy and had excessive amounts of related party (crony) loans. Much of the liquidity credit went directly to support bank customers that were actually part of the same group as the bank owners, leaving depositors and the government holding worthless or greatly devalued assets when the banks ultimately collapsed.

The temptation for abuse was excessive and did not meet serious resistance. Because of inappropriate related party lending, owners of large private banks were incentivized to funnel the liquidity credits to prop up their biggest customers, that is, themselves. The funds were quickly shifted to ailing local corporations and then sent abroad in hard currency to escape the grasp, however feeble, of other domestic creditors, the largest of whom ultimately became the Indonesia people through its failed government.

Thus, the major reason Indonesia suffered so much more than other crisis countries a decade ago was the systemic concentration of the assets of the modern business sector in the hands of a tiny, untouchable clique causing an ill and aging dictator to confuse saving their interests with saving the national economy.

Today, much has changed for the better. Ownership of private sector assets is now much more diverse. Indonesia's banks are much better managed and Bank Indonesia supervision is tighter and independent. The blatant misbehavior of the past can no longer occur in a systemic fashion. Dangers, however, always exist in the financial environment.

The next crisis will probably result from vulnerabilities that we do not fully recognize at present. This will be the subject of a later column. But because of changes made to date, particularly more diversified ownership, better financial supervision and greatly reduced related-party lending, Indonesia is much better placed to weather the next financial storm. It will not originate here and we will not be harmed disproportionately.

[The writer is a businessman who has lived and worked in Indonesia since 1977. He is a past Chairman of the International Business Chamber of Indonesia and Amcham Indonesia.]