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ThewordeconomyMakingtradepolicyinanewdemocracyafteradeepcrisis:Indonesia1.IntroductionHowdodeepcrisesaffecttradepolicyindevelopingcountries?Theconventionalhistoricalviewisthateconomiesturninward,inanattempttoprotectfirmsandemployment,torestoretradebalances,andinresponsetotheperceivednegativeconsequencesofglobalisation.Asacorollary,itisarguedthatgovernmentsfinditeasiertoreformduringgoodtimes,ofstrongeconomicgrowthandlowunemployment.However,overthepasttwodecades,analternativeviewhasarisen,basedontheobservedbehaviourofcountriesincrisis.ThisiswhatLittleetal.Termedthenewliberalisation.Thatis:thebalanceofpaymentscrisiscreatestheshockenvironmentinwhichtradeliberalizationandotherradicalpolicychangesbecomepossible.LalandMyintdevelopedthisargumentmoregenerallywiththeircrisishypothesis,thatmajorreformsareoftentriggeredbyasignificantevent:amajoreconomiccrisis,amilitarydefeat,thecessationofexternalsupportoranaturaldisaster.Thepoliticaleconomyexplanationsforthischangedbehaviourarecomplex,andincludebothgenericandcountry-specificfactors.ThepurposeofthispaperistoaddtoourunderstandingofthenexusbetweentradepolicyandcriseswithreferencetoastudyoftheIndonesianexperiencesincethelate1990s.Afterthreedecadesofmostlyrapideconomicgrowth,accompaniedbyliberalisationinthelate1960sandmid-1980s,thecountryexperiencedadeepeconomicandpoliticalcrisisin1997-98.in1998,theeconomycontractedbyover13percent,thegovernmentsignedontoahighlycontroversialInternationalMonetaryFundprogramme,andthe32-yearruleofPresidentSoehartocametoanabruptend.Authoritarianpoliticalstructuresgavewaytoaweakenedstate,anewandfragiledemocracyandmajorchangesinpoliticalandinstitutionalstructures.Ourmainconclusionisthat,perhapsunexpectedly,theIndonesianeconomyremainedlargelyopenoverthisperiod.However,insomeinstances,holdingthelineontradereformhashadmoretodowiththepersonalitiesinvolvedintradepolicyratherthantheinstitutionalprocessesforformulatingthatpolicy.Thus,opennessisprecarious,andnotdeeplyembeddedineithersupportiveinstitutionalisedpolicy-makingstructuresorwidespreadpopularopinion.Moreover,barrierstodomestictradehaverisensignificantlyandnowposeasubstantialthreattothecountryeconomicintegration.Thislatterissuehasreceivedrelativelylittleattentionintheliteratureontradepolicyandcriseswherecentralgovernmentauthorityisgreatlyweakened.Weareunawareofasubstantialliteratureonthissubjectforotherdevelopingcountries,addressingbothinternationalanddomestictradepolicy.ButweconjecturethattheIndonerienexperiencehaswidegeneralapplicability.Thisisthereforeanissuethatotherdevelopingcountriesandinternationaldevelopmentagencieswillneedtoaddressinpost-crisisenvironments.Therestofthepaperisorganisedasfollows.Section2providessomecontextonIndonesia,includingbriefreviewsoftheevolutionoftradepolicy,thesevereeconomiccrisisof1997-98,andthenewpost-crisispolicy-makingframework.Section3examinesinternationaltradepolicysincethecrisis,whileSection4investigatesthechangingdomestictradepolicyregime.Section5providesananalysisofthebureaucracyill-fatedattempttodevelopanewtradepolicylawinthisnewpoliticaleconomyenvironment.Section6sumsupourargumentsanddiscussessomebroaderimplication.2.THEINDONESIANCONTEXTA.TradePolicyunderSoehartoItissometimesobservedthatIndonesiawasmadebyGodforfreetrade.Thisisareferencetoitsstatusastheworldlargestarchipelagicnation,itsporousinternationalborders,13000islands,sometimesrampantsmuggling,andproximitytofree-tradeSingaporeandthemajorinternationalsealanesoftheMalaccaStraits.However,theofficialtradepolicypendulumhasswungoveritssixdecadesasanationstatefromvirtuallycompletecommercialisolationtoveryopenregimes.TherehavebeenmajorchangesinIndonesiatradepolicyregimesincethe1960s.By1965,thecountryhaddisengagedfromglobaltradeandinvestment,andwithdrawnfromtheUnitedNation,theIMFandtheWorldBank.Thepoliticalturbulenceof1965-66thenusheredinaradicalshifttowardseconomicorthodoxy,includingpromptandeffectivemacroeconomicstabilisation,andanopencommercialpolicy.Thisperiodofliberalismwasshort-lived,however.Bytheearly1970s,therewasanationalistresurgence.Tariffswereincreased,but,moreimportantly,thegovernmentembarkedonanambitiousprogrammeofheavyindustrialisationunderpinnedbyincreasedresorttonon-tariffbarriers.Itwasonlyintheearly1980s,andmoredecisivelyinthemid-1980sasoilpricecontinuedtofall,thatkeyeconomicpolicy-makerstheso-calledtechnocratswereabletoarrestthetrend,andthenembarkonaseriesofmajortradereforms.Thesecondhalfofthe1980sconstitutedthehighpointofthereforms.Thiswasahighlysuccessfulcaseoflawpolitics,inSoesastro.Thetechnocraticreformerslargelyeschewedhighpolitics,inthesenseofengagingingrandideologicaldebates.Rather,theydevelopedastrategicreformprogrammeand,partlywiththeassistanceoflow-profileforeignadvisors,persuadedthepresidentthat,inviewofthefallinginternationaloilprices,thecountryfacedaMexicoscenarioofdebtcrisisandIMFinterventioniftheliberalisationswerenoteffected.OnceSoehartowasconvinced,reformwasswiftandeffective.Therewaslimitedpublicdebate.ThemostcompletesetofestimatesofthetradepolicyregimeinthelateSoehartore