'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