Crux of the crisis lies beyond economics
Crux of the crisis lies beyond economics
By Makmur Keliat
SURABAYA (JP): The idea of adopting a currency board system
(CBS) has become a contentious issue. The bone of contention can
be formulated in the following way. Can the CBS become a panacea
to stabilize the value of the rupiah?
For the proponents, the system is certainly a promising
alternative. It will peg the rupiah at a fixed exchange rate to
the chosen anchor currency, say, the U.S. dollar. So there will
be a sense of stability in the exchange rate.
In addition, since every unit of rupiah will be backed by the
equivalent of the government's foreign exchange, and because
everybody would legally be free to exchange the rupiah for the
dollar or vice versa, there would be a sense of certainty in the
exchange rate.
These two benefits, stability and certainty, are regarded as
vital requirements for the management of economic activities.
However, there are strong reasons for doubting the benefits of
the system.
To begin with, the CBS will work effectively if efforts to
gain foreign exchange are not impaired. Since Indonesian exports
are not immune to external dynamic, and since an export-led
economy takes much time to grow, the system will not instantly
provide the country with a certainty as conceived by its
proponents.
If the amount of foreign exchange gained from exports recedes,
the existing situation will be aggravated. There are two
possibilities if this situation occurs.
First, the government, according to the game rules built into
the system, will reduce the amount of rupiah circulating in
society. This means that the Indonesian economy will be forced to
stagnate.
Second, by breaking the game rules, for instance, through
issuing a new regulation that not all people will be allowed to
exchange their rupiah for U.S. dollars, the system in reality
will be in contravention of the foreign exchange regime already
adopted by the government. The result, the black market will
mushroom.
The concept of stability and certainty inherent in the system
is therefore totally misleading and inappropriate.
Furthermore, the CBS will be enacted on the condition that the
central bank is not permitted to provide financial loans to banks
and all banks are presumed to be rational and efficient in
setting their lending limit.
At this point several questions need to be raised. If the
central bank cannot act as a lender of last resort, what will
happen to a bank which is beset with the problem of insolvency?
Second, if a bank defaults and goes bankrupt, what will happen
to those who deposited their money in the bank?
Related to this question, there seems to be a contradiction in
terms between the recent government decision assuring people's
deposits in banks and the CBS mechanism.
Moreover, it has become a well known fact among Indonesians
that even under the supervision of the central bank, some banks
have violated their lending limits, as clearly shown in the
closure of 16 banks last year, let alone without supervision.
In short, the enactment of the system would imply a sort of
inconsistency in government policy regarding the issue of
national banking management and of how to restore people's
confidence.
Finally, there is a strong tendency in the CBS to presume that
the usage and management of national currency exists in a
political and social vacuum whereas in reality they cannot be
mutually exclusive.
Indeed, as also recognized by some government officials, the
instability of rupiah value against the dollar is a ramification
of the crisis of people's confidence.
To put it in other words, the drastic fall in the value of the
rupiah against the dollar is not an antecedent of monetary crisis
but a product of deeper economic, social and political problems
such as nepotism, political misbehavior, and economic profligacy.
Such widespread practices have corroded people's confidence in
governmental institutions including its economic policy. By
implication, it would be very difficult for the CBS to work
effectively since it starts from a predisposition that people's
confidence has already been gained while, in actual fact, it has
not.
In consequence, a sort of hesitation raised by some observers
to the idea of the CBS is not unreasonable.
Seen from an historical perspective the question of how to
stabilize the value of national currency cannot be separated from
the question of how people interact with the government.
In conventional terms, money has its origins in the process of
economic exchange.
Since the process of economic exchange is as old as human
history, money could also be considered an agent of the market.
It does not necessarily mean, however, that without money there
will be no market. The reason is that the propensity for economic
exchange is a natural phenomenon.
History has shown that a long time before money was invented
there were trade relations between European and African kingdoms.
Therefore, the lack of money will result only in more limited
trade and will largely be in the form of barter.
Irrespective of this fact, the introduction of money into a
social system and its growing use -- monetization -- has
intensified the process of commercialization.
What is taking place in this process is that people's
acceptability of money, either as a medium of exchange, a
standard of value or as a store of wealth, is not merely a
natural phenomenon as many economists believe, but closely
intertwined with the interaction between government and market
forces.
It is against this historical backdrop that some academics are
of the opinion that money derives its value and usage from a
political authority, based on the State Theory of Money.
The theory in essence assumes that since the mandate to make
money lies in the hands of the ruling government -- seen in this
regard as the symbol of the state authority. The value of money
would be fully subject to the unilateral decisions made by
princes in Europe, in the past, to decrease the precious metal
component of its coins or debate that their national currencies
undermined the attractiveness of and confidence in their
currency.
Such decisions merely encouraged their citizens and traders to
hold foreign currencies as they suspected that, for the purpose
of a narrow political economic agenda, money was treated by the
ruling government merely as an agent of state power rather than
as an agent of the market.
In consequence, one could also say that although the
government has political authority to make money and force people
to accept the value of money at a certain rate, this right of
seigniorage is not a sufficient foundation for its broad
acceptability.
Especially in this era of interdependence, the people's
confidence in national currency cannot be engineered. As a matter
of fact, an increasing interdependence has undermined the
autonomy of national monetary tools, not only for developing
countries but also developed countries.
In conclusion, the government should avoid thinking about a
shortcut to resolve the current monetary problem. The following
analogy may be useful for comparison.
A monetary system is exactly like a car. The way the car moves
forward depends on how the driver drives, and on his or her
commitment to observing the traffic lights.
If he or she is careless and does not pay attention to the
traffic lights, then no matter whether the car is new or old,
made in a developed country or made domestically, it is highly
likely that an accident will occur.
Keeping this analogy in mind, it is better for the government
to be committed to the old system rather than spending much
energy thinking about a new one.
What is more important and urgently needed in this current
situation is thinking about and searching for a solution for how
to produce and supply adequate food commodities for the nation's
population.
The reason is obviously simple, the belly still rules the head
for most people. If they cannot get enough food, it will be out
of the question to ask them to think rationally.
Unfortunately, many governments, when overwhelmed by a crisis,
tend to find a shortcut, or even a scapegoat. Hopefully, the
Indonesian government will be an exception.
The writer is a lecturer in political sciences at Airlangga
University, Surabaya.
Window: Seen from an historical perspective the question of how to
stabilize the value of national currency cannot be separated from
the question of how people interact with the government.