Imminent global crisis haunts RI economy

Imminent global crisis haunts RI economy

Indonesia and neighboring crisis-hit Asian countries have
failed to find quick solutions to their monetary crises.
Economist Sri Mulyani Indrawati, vice chairwoman of the
University of Indonesia's Center for Social and Economic Studies,
discusses possible impacts on the world economy.

Question: International Monetary Fund (IMF) Director for Asia-
Pacific Hubert Neiss said recently that he was considering the
possibility that Indonesia adopt a controlled foreign exchange
system. What does such a statement mean?

Mulyani: I am under the impression that IMF and Bank
Indonesia (central bank) officials are somewhat divided over a
free foreign exchange regime because they have been making all-
out efforts to try to stabilize the rupiah's exchange rate by
improving control of the money supply -- mainly through
increasing interest rates on Bank Indonesia's promissory notes
(SBI) to achieve monetary targets -- and the monitoring of money
supply developments. And yet, the rupiah's exchange rate remains
uncontrollable and even vulnerable to sentiments not related to
objective economic fundamentals.

It is, therefore, understandable if Neiss was thinking of
economist Paul Krugman's theory, which has been adopted by
Malaysia, on the isolation of one country from the global market
to protect itself from speculators.

These days, economists throughout the world are anxious,
realizing that the global money market frequently shows
uncontrollable and undetectable developments, while there is
still no credible mechanism that can counter such developments.

Q: What has made the global money market uncontrollable,
weaknesses in the world economic system or those in certain
countries?

M: Both. Structurally, the world economic system has weaknesses,
so that decisions taken by foreign investors can produce very big
risks for developing countries accommodating their capital. Poor
information services, for example, often lead fund managers to
make mistakes because they generally use incomplete information
from CNN, Reuters, Bloomberg and others in making decisions. They
then transmit their decisions through oligopolistic information
networks to their offices worldwide.

The global market also has no built-in stabilizer.

On the other hand, developing countries have weaknesses in
administration, bureaucracy, policies and other infrastructure
facilities, so that they have no early warning system that can
inform them if they have received too much foreign capital.

The IMF and the World Bank, therefore, have to take
responsibility, because they are multilateral institutions which
have helped design policies, and acted as advisers to developing
countries.

Q: Even though Indonesia has adopted various measures prescribed
by the IMF, it fails to stabilize its rupiah conversion rate. How
if the country adopts a controlled foreign exchange system?

M: It is true that Indonesia is committed to prescriptions from
the IMF, but not all of them are implementable due to
shortcomings in the domestic setting. The country, for example,
has been trying to carry out the IMF's advice on the restructure
of its banking industry but institutional and bureaucratic
problems are hindering the implementation of international
standards to the industry. Measures prescribed by the Fund
generally have medium and long term goals but Indonesia is also
facing short-term problems that can hinder the full
implementation of the measures.

The option for Indonesia to adopt a controlled foreign
exchange system, such as a currency board system or any other
form of capital control, is still open, but we have to calculate
the costs. Each system has its own risks and requires sacrifices.

Actually we don't have many choices for our foreign exchange
system because our conditions are different from those in
Malaysia. Malaysia is more prepared than Indonesia to adopt a
controlled foreign exchange system because that country, which
has implemented a currency board system, has long introduced
restrictive regulations for its banking industry. Its domestic
banks, for example, are not allowed to open dollar accounts,
while foreign banks operating there, may not open accounts in the
domestic currency. The flows of foreign currencies into and out
of that country, therefore, are easily detectable.

By comparison, Indonesia is so liberal that we do not know
exactly where our money circulates.

Q: Do you agree with money market executive George Soros'
statement that capitalism is on the brink of collapse?

M: Yes. Capitalism, with its globalization which creates
disparities between the rich and the poor, has an element of self
destruction.

Q: Now that socialism has failed to create prosperity for its
followers, which economic system do you consider superior?

M: I think the current situation involves a fine-tuning towards a
mixed system of capitalism, which offers an extraordinarily large
element of growth, and socialism, which offers fairer
redistribution of income.

Unfortunately, any structural change in the world economic
system will need credible leadership, while the world leadership
is now vacant. The vacuum in the world leadership may cause the
world to fall into a global crisis in the coming two to three
years.

Therefore, if Indonesia fails to restore its economic
conditions within two to three years, its economic crisis will
worsen when the world enters its global crisis.

If our own leadership is weak, I'm afraid we will have to
follow the IMF's experimental measures which are frequently very
costly and irreversible in social and political terms. We,
therefore, must take command in trying to achieve our annual
goals. (riz)