Indonesia, Iceland and the IMF – Part I

By Dr. Terry Lacey – Jakarta

They both begin with I. They are both a group of islands. They both have a lot of fish. They both have volcanoes, geothermal energy, hydro-power and tourism.

There is however one more thing that Indonesia and Iceland have in common that also begins with “I” and that’s the IMF – the International Monetary Fund.

Indonesia had a banking crisis in 1997-8 that decided the future of the country and Iceland had a banking crisis in September-October 2008 which will also determine its future.

But first, some history, religion, economics and politics without which the full impact of the imposition of IMF austerity programs on Indonesia in 1997-8 and Iceland in 2008 cannot be understood.

Iceland is between Greenland, Norway and Britain, has a population of 320,000 with a land area of 103,000 square kilometers. Indonesia is between Australia, Singapore and Malaysia with a population of 230 millions and covers 1.9 million square kilometers.

Both Indonesia and Iceland have democracy, a Parliament and a President. Indonesia has had a proper democracy and Parliament since the fall of Soeharto in 1998. Iceland has the oldest parliament in the world, the Althing, which first met in the year 930.

Iceland was the first (and perhaps only) country to change its official religion by Parliamentary decision, in the year 999.  It needed to have allies that controlled shipping routes and to go the same way, at that time, as Norway.

Religious enthusiasts in 999 were baptized in the nearest cold river, while parliamentary pragmatists trekked to the nearest hot springs to be baptized.

During the Reformation, the Protestant rebellion against Catholic orthodoxy, Iceland became solidly Lutheran, following trends in Scandinavia. The last Catholic bishop of Iceland was beheaded in 1550.

Indonesian religious history shares cross-cutting historical linkages with trade routes and colonialism. Islam came relatively late. Its spread reflected the need to find alternatives to the harsh mercantilism of Christian colonizers, especially the Portuguese.

Indonesia is multi cultural in religious terms with strong Protestant and Catholic minorities as well as Hindus and Buddhists. The majority religion is a relatively mild and tolerant version of Sunni Islam, influenced strongly by over 40 schools of Sufism, plus an underlay of mysticism (reflecting the continuing cultural influence of the old religions) along with a strong hint of Hindu influence.  

Iceland became linked politically first to Norway and then to Denmark. When neutral Denmark was occupied by Germany in 1940 Iceland avoided the same fate, but was occupied by Britain in May 1940. The United States took over as occupier in 1941.

Iceland was a Danish colony, and did not gain independence until 1949. After World War II its economic and security links with Great Britain and the United States became stronger. It joined NATO and the European Free Trade Association, but not the EU.

Indonesia was a Dutch colony and occupied by Japan during World War II. In 1945 the Indonesians tried to assert their independence when the Japanese left, but the British, led by the Supreme Allied Commander in South East Asia, Lord Louis Mountbatten, sided with the Netherlands to keep Indonesia Dutch. Several thousand Indonesians died fighting the British in the city of Surabaya in November 1945. The military and diplomatic struggle for independence ended in 1949.

In 1948 the British changed sides and supported independence, as did the United States.  Since then both the USA and Britain have been influential in Indonesian history. Both saw a post-Soekarno nationalist military-backed Muslim conservative Indonesia as a bulwark against communism in South East Asia, and were sympathetic to the removal of leftist-leaning Soekarno from power and the destruction of the Indonesian communist party, the PKI. Over half a million people died in the upheavals between 1965 and 1968.

The British played a role in these events, covertly financing black propaganda to help bring Soekarno and his regime to an end, with Western-backed Soeharto coming to power in a military coup. Indonesia is not yet reconciled to the details of this history. Ex political prisoners and their now grown-up children now seek more open reconciliation.

Politically both Iceland and Indonesia came to terms with the rise of the United States after 1945. Both were occupied by the British during the war and both had confrontations with the British during the 20th century.

What the British called the Indonesian confrontation, describes when Indonesia was sympathetic to locally led communist uprisings in Borneo prior to the fall of Soekarno. British public opinion saw this as led by Indonesian infiltration, but this was also about British defense of the borders of Malaya and Brunei and their oil reserves.

Cultural identity is important to Indonesians and Icelanders. In Indonesia the sense of national identity is linked to decolonization from the Netherlands, reinforced by a strong sense of religious identity in this multi-religious, pluralist but Muslim-led nation.

Compared to Iceland, Indonesian national awakening and consciousness are very new, reflecting a 20th century struggle against colonialism, reinforced by stories of Hindu and Buddhist feudal kingdoms in Java.

In Iceland national consciousness was first created by the original settlement, defended by a strong parliamentary democracy and then reinforced by storytellers who produced the Sagas, closely associated with the consolidation of Icelandic Nordic identity.  

I met a New Zealand scholar studying the Sagas in Reykjavik in the early 1970s and he said that this quest to consolidate Nordic identity reflected that Iceland was not exclusively Nordic. The population originally included many Irish slaves as well as Scots settlers. In modern times 7% of Icelandics are Lithuanian, Polish or German.                

I got to know Iceland because I met President Olafur Grimmson when he was a post graduate student at Manchester University. He invited me from Manchester to Reykjavik, to help introduce International Relations at the University of Iceland.

My class was filled with air hostesses from two Icelandic airlines Loftleidir and Saga, and we learned about NATO, the United States and Russia, NATO, the Common Market, and the post-war world of Bretton Woods and the World Bank.

I remember at the time marveling at the pragmatic history of Iceland, and at the rugged determination of Icelanders to keep their independence.

As the Cold War developed the Icelandic decision to allow an American base at Keflavik, provoked riots, but was a firm decision to join the U.S. side in the Cold War, resulting in some Icelandic girls marrying American soldiers!

Throughout the post war reconstruction of Europe, Iceland kept out of the EU. The Icelandic economy was based on natural resources, notably fish, but also on geothermal and hydro energy and electricity-based aluminum processing.

The heavily extractive Indonesian economy has also been based on natural resources, notably on oil and gas, minerals, and agricultural commodities, plus a vast and largely illegal forestry industry. Like Iceland, Indonesia has huge reserves of geothermal energy and hydro power, as yet largely untapped.

The financial downfall of Iceland in October 2008 was brought about by the Icelandic banking industry developing out of all proportion to the size of the Icelandic economy, with leverage and risk-taking going way beyond the financial resources available.

This sparked a repetition of the hostility felt with Britain during the Icelandic-British fishing wars, when British and Icelandic navy ships and trawlers had near-misses as part of a battle of naval brinkmanship fought over fishing rights. Iceland fought to extends its fishing limits from 4 miles to 12 (in 1958), from 12 miles to 50 (in 1972) and finally to 200 miles in 1975. The British lost their final fishing quota within Icelandic waters in 2002.

In October 2008 the new Icelandic-British spat reflected the penetration by Icelandic banks of personal and institutional banking in the United Kingdom, in the politically sensitive areas of municipalities, essential services and social welfare NGOs, also affecting half a million private British citizens with accounts in Icelandic banks. The British used anti-terrorist legislation to freeze Icelandic banking assets in Britain. 

What Indonesia shared in common with Icelandic history was not only, bizarrely, a common history of British military occupation and of subsequent confrontations with Britain, but also that as the Icelandic and Indonesian economies developed during the end of the 20th century, they both joined the global economy and they both built up, but ten years apart, a banking crisis of enormous proportions.

The banking crises of Iceland and the UK in 2008, has been of such size that major political consequences are inevitable. In Indonesia in 1998 this meant the fall of a regime as well as of a government.

In the second part of this two part series we see how these recent banking catastrophes in 2008 may prove to be the catalyst for major financial and political changes, and how Muslim-led Indonesia, located in South East Asia, is now part of an emerging new world order along with China, whereas Iceland and the United Kingdom, in their different ways, are both part of the old world order, which must now give way to change.

-Dr. Terry Lacey is a development economist who writes from Jakarta, Indonesia, on modernization in the Muslim world, investment and trade relations with the EU and Islamic banking. He contributed this article to Contact him at:

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