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)