'Indonesia Assessment 1994' focuses on finance sector

'Indonesia Assessment 1994' focuses on finance sector

Indonesia Assessment 1994: Finance as a key sector in Indonesia's Development Edited by Ross H. McLeod Publishers: Research School of Pacific and Asian Studies, Australian National University, Canberra, Australia; and Institute of Southeast Asian Studies, Singapore 1994, xxii and 353 pages

JAKARTA (JP): Indonesia has earned international recognition for having adhered to an open-capital policy since 1970, long before it became fashionable, and for its exceptionally bold measures of financial deregulation in the 1980s.

Not only has the country's financial system become one of the most open in the developing world, but also its sequence of deregulatory measures, and the relative success attained, has been a puzzling state of affairs for many theorists. Hence, the story of Indonesia's financial development has been a subject of numerous studies.

Indonesia Assessment 1994 is one such study. What makes this book different is, perhaps, its compact comprehensiveness and the range of names cited as contributors. Two senior technocrats, Ali Wardhana of Indonesia and Stephen Greenville of the Reserve Bank of Australia, spice up the theme of the book with their chapters. Other contributors include two senior Bank Indonesia officials, Boediono and Hendrobudiyanto, economist Anwar Nasution, Australian and American academics George Fane, David Knox, David Linnan and Kathryn Marshall, and some other banking and capital/financial market practitioners.

Perhaps to the fine surprise of many, the book uses relatively reader-friendly standards of English, without resorting to too much mathematical abstraction common in such economics-oriented publications. This is done while an appreciable level of technical elegance and depth is retained, especially in the main chapters of the book.

Indonesia Assessment 1994 is based on "Indonesia Update 1994", the latest in the series of annual conferences on Indonesia held at the Australian National University in Canberra. The conferences, focusing on a particular aspect/sector of Indonesia every year, have been jointly organized by the Indonesia Project and the Department of Social and Political Change at the university. Indonesia Project, established in 1965, is a research unit specializing in issues of economic development in Indonesia. This research unit has been one of the most active and prominent "Indonesianists" outside Indonesia itself -- demonstrating the importance Australia places on its northern neighbor.

Two papers by economist Mari Pangestu and Richard Robinson (author of The Rise of Capital) assessing recent developments in the Indonesian economy and politics, respectively, precede other chapters in the book. Despite their apparent appeals, the content of these two papers somewhat strays from the theme of the book.

Foundation

As one of the principal architects of Indonesia's financial deregulation policy, Ali Wardhana asserts his belief that Indonesia's financial reform thus far has yielded a better foundation for future economic development in the country. Thanks to deregulation, today's financial services and instruments are broader, more flexible and better suited to meet the varying needs of the expanding economy.

However, Wardhana makes additional notes. If the objective of deregulation includes improvements in both cost and allocative efficiencies of financial intermediation in the system, Indonesia seems to have achieved the first, but not quite the second. The persistence of bad credit suffered by the banking sector, for instance, indicates that there has been, instead, a deterioration in the loan portfolios of some banks. Thus, contrary to the dictum of allocative efficiency, resources have been misallocated to areas with poor returns.

Indeed, Wardhana cites in the beginning of his paper that the classic doctrine of financial liberalization has relapsed somewhat against financial crises in some Latin American countries in the late 1970s and the savings and loan debacle in the United States in the 1980s. Hence, the faith in deregulation today has become two-pronged: elimination of controls should be followed with prudent requirements. Indonesia did just that, but it might have erred as it timed and weighed its moves. The removal of controls -- especially in terms of the reserve requirement, the minimum capital for establishing new banks and macro-liquidity of the economy -- might have been too drastically committed. After a few years of feverish growth, the government might have also tightened economic liquidity rather too harshly and imposed prudential regulation rather too eagerly.

Wardhana's counterpart from Australia, Stephen Greenville, is actually full of praises for Indonesia. Seeking pragmatic balances, responding to policy misjudgements decisively and keeping the fundamentals in mind, he believes, have been among Indonesia's policy ingredients. In his words, Indonesia's success has "depended on tempering the textbook view with a very large dose of common sense and, in particular, a willingness to modify and change direction where necessary."

Greenville tells of the no-glossier tale of financial deregulation in Australia. Liberalization in the kangaroo continent in the 1980s also failed to bring about textbook-style allocative efficiency. In the face of a wide savings-investment gap, deregulation in Australia prompted offshore borrowings that worsened the country's current account balance. The aftermath of deregulation was a particularly gloomy period of bad investment choices, with, for example, the presence of "see-through" buildings largely devoid of furnishings and tenants.

Nonetheless, Greenville is far from losing faith in deregulation. The true virtue of deregulation, in his view, comes with the discipline it imposes on the government. By being careful with inflation, interest rate and exchange rate movements as signaled by forces unleashed by deregulation, a government is disciplined to maintain macroeconomic order. Not only will such discipline yield the expected economic efficiency in the long run, but it will also give a "mind-set" among policy makers that is best suited to take on the volatility of modern financial markets.

In the remaining 12 chapters of the book, there are scores of specific issues of interest. Boediono, for instance, discusses the constraints facing monetary policy makers in Indonesia, calling the extreme vulnerability of Indonesia's markets to expectations as characteristically Indonesian. Fane examines issues behind Indonesia's peculiar sequencing of deregulation measures. Nasution seeks the red threat connecting the financial sector and the real sector, proposing that the concentration of Indonesia's economic reforms in finance has helped open up new areas of expansion for large and well-connected business groups.

Hendrobudiyanto and Manggi Habir talk about bank soundness evaluation from the perspective of Bank Indonesia and commercial banks respectively. Kathryn Marshall lays out the pros and cons around the deposit insurance issue. Cyrill Noerhadi and David Linnan depict the development of Indonesia's capital market, Catherine Prime and David Knox present a story on the insurance and pension funds industries, while Ross McLeod, who is also the editor of the book, discusses matters around Indonesia's large stock of foreign debts. The remaining two chapters by Soeksmono Martokoesoemo and Henk Moll/Karel Palallo deal with small-scale and cooperative financing in Indonesia.

One weakness of this book, which perhaps reflects the difficulty of producing a coherent volume involving 18 writers, can be sensed in some overlapping between chapters, especially those concerning the banking sector. Furthermore, a few chapters, or parts of them, appear to be quite descriptive, unavoidably falling short of the standard set out by the high-powered discussion between the two masters of technocracy -- Ali Wardhana and Stephen Greenville -- in the main chapters of the book.

-- P. Usmanto Njo