Binny Buchori, Jakarta – What do we remember about the economic crisis of 10 years ago? Some of my recollections are: Fluctuation of the rupiah's value against the U.S dollar, increasing prices of almost all goods, people rushing to grocery stores, fighting to buy food and household goods that were difficult to find, bank closures causing panic beyond measure all over the country, followed by private enterprises closing due to bankruptcy, causing a dramatic rise in unemployment.

Probably to most Indonesians at that time, the feeling was that of shock and great uncertainty. How would one know that Indonesia's economy, which for so many years looked robust and gave the impression of stability, would suddenly become so volatile?

Analysts have produced many reports and studies as to why Indonesia's economy hit rock bottom during the crisis. Some of the issues often discussed as the cause of the crisis are corruption, bad governance and weak fiscal policy.

The economic crisis did hit Indonesia very badly. One illustration is the soaring external debt. The country struggled to pay its external debt, which increased dramatically from $129 billion in 1996 to $151.2 in 1998. Consequently, the ratio of external debt to GDP also increased from 58.3 percent in 1996 to 167.9 percent in 1998. With this huge debt stock and debt burden, Indonesia sacrificed its resources for servicing the debt.

It is therefore not surprising that Indonesia's crisis has been described as very costly.

To overcome the crisis, the Indonesian government, among heated debate and arguments, asked the International Monetary Fund to come to Indonesia, with the belief that Indonesia's economy would recover. The IMF came with a $43 billion bailout as a standby loan.

The heated debate was not baseless, because many Latin American countries and African countries experienced IMF programs in the 1980s and 1990s, when they suffered from financial crises, and there was evidences that IMF programs for tackling economic crises in these countries were not always successful.

There are at least three myths about IMF programs: First, that they bring new private investors to the countries. Second, that they increase investor confidence. Third, they stabilize exchange rates.

The IMF program comes with conditions, known as the Structural Adjustment Program, aimed at generating savings and foreign exchange to fix the balance of payment and facilitate debt repayment. The principle of this is financial stabilization by imposing strict fiscal and monetary discipline. This approach makes fundamental changes in the way the state functions.

The IMF requires the government to be more efficient, so that it has to cut subsidies, including subsidies for fertilizer, oil, education and health. The government also has to allow the market to have a bigger role in the economy through the privatization of state-owned enterprises, including water, telecommunications and power firms.

Indonesia also had to allow the country to integrate further with the global market by reducing import tariffs and opening up the domestic market to imported goods and international retailers. The government was also obliged to allow the free flow of capital.

Once a country decides to seek a bailout from the IMF, it has to deal with sectoral adjustments, which are facilitated through lending from multilateral and bilateral creditors. In Indonesia, for example, the World Bank, released a huge loan called the Policy Reform Support Loan I, amounting to $1 billion.

The ADB gave Indonesia a Financial Guarantee Reform, amounting to $1.5 billion, to develop all necessary regulations and policies for privatization and deregulation in Indonesia.

Did the prescription work? As experienced in Latin America and African countries, the Structural Adjustment Program created a number of problems. Financial liberalization in Ecuador, combined with the absence of good governance, led to financial crisis and made the government use more than $7 billion of public funds to bail out banks. (Structural Adjustment: the SAPRI Report: the Policy Roots of Economic Crisis, Poverty and Inequality, Zed Books, 2004).

In Indonesia, the public, during the IMF program and in the post-IMF period, experienced an increasing cost of living and witnessed a flood of imported goods, from agricultural products to second-hand clothing, as well as international retail businesses.

The flow of agricultural products came as a consequence of the lifting of import tariffs, which at the same time made Indonesia become a net importer of food. In 2003, Indonesia experienced a trade deficit of $1.4 billion in food crops and $134.4 million in livestock (Witoro: Memperdagangkan Kehidupan, Menelisik Nasib Beras di bawah Pasal-Pasal WTO in Globalisasi Menghempas Indonesia, LP3ES and Perkumpulan PraKarsa, 2006).

Meanwhile, the prescription of financial stabilization actually created financial destabilization, as shown in the case of the closure of 16 banks with no proper preparation, which resulted in capital outflow amounting to $5 billion.

On this issue, the Independent Evaluation Office (IEO) of the IMF admitted it made a mistake. In the report, The IMF and Recent Capital Account Crisis, Indonesia, Korea and Brazil, 2003, it stated that the IMF misjudged the severity and the macro-economic risks in the banking sector.

The intervention lacked a comprehensive bank restructuring strategy and thus the closures deepened the crisis. The report also admitted the IMF failed to understand the different situations in Brazil, Indonesia and South Korea, and yet applied the same remedy.

In Brazil, the IMF identified correctly the problem: macro-economic imbalance, because that is the expertise of IMF. But in Korea and Indonesia the crisis was caused by weak financial corporate sectors, and the IMF failed to produce an accurate assessment.

The IMF and World Bank gave the same prescription that they gave to Latin America and African countries even though the circumstances were very different. And the public experience in these countries suggests that the remedy does not always work.

The admission of the IEO reaffirms that they made a the mistake. But the irony is that despite the mistake, Indonesia cannot hold the IMF accountable. Indonesia paid its debt to the IMF in full, no reductions, and there were no sanctions for the institution.

This reaffirms the opinion that it is time that we reformed the governance of the IMF, so that it is transparent and accountable. One of the recommendations from the High-Level Panel on IMF Board Accountability, comprised of scholars, former IMF staff and activists, released in April 2007 by the New Rules of Global Finance, a non-profit organization based in Washington DC, is that IMF should have an external complaint mechanism in the form of public sessions, which would allow the public to review some of the controversies such as the Asian financial crisis. This would lay down the foundation for the IMF's accountability and would help avoid the same mistakes from being made.

It can be said that the "one size fit all" approach of the International Monetary Fund in tackling the crisis did not work.

The Indonesian crisis should teach all of us that deregulation, privatization and liberalization may not be the one and only solution for crises. To avoid the same mistake in the future there should be a reform in the governance of international financial institutions.

[The writer is executive director of Perkumpulan PraKarsa.]