Indonesian development analyzed

Indonesian development analyzed

Indonesia Assessment 1994. Finance as a Key Sector in Indonesia's
Development. Edited by Ross H. McLeod. Published by Research School
of Pacific and Asian Studies, Australian National University and
Institute of Southeast Asian Studies, 1995. Paperback, 353 pages.

MELBOURNE, Australia (JP): Reading Ross McLeod's Indonesia
Assessment 1994, Finance as a Key Sector in Indonesia's
Development, I could not help seeing the macropicture. While
private and public finance and banking experts plan, review and
debate what should be happening with the Indonesian exchange rate
and money market, millions of Indonesians still stash what money
they have under their mattresses.

However, in the context of the finance sector of national
development, these millions have yet to be secured by the banking
culture. Oblivious they may be to the celestial activities of
banks, the fact is their earthly lives are inexorably affected by
the bank's activities.

The book traces and analyses financial activities and changes
that occurred between the banking deregulation package of 1983
and 1994, when the book was compiled.

In an early chapter on recent economic development, economist
Mari Pangestu points to the continuing success of Indonesia's
macroeconomic management with cautions optimism. There are
hurdles yet to overcome, such as problems in managing the money
supply and the fall in non-oil exports. While deregulation was a
necessary precursor of the macro economic reforms that has
brought growth and rapid development to the nation's economy,
careful planning and skillful management were crucial.

Ali Wardhana, economic advisor to the government, gives an
overview of financial reform. He underlines the difficult task of
devising a regulatory framework that will improve economic
efficiency and welfare, given the fact that government regulators
are not always wise, fair or efficient.

Wardhana, former coordinating minister for financial and
industrial affairs, stresses the importance of finance as an
input into all economic activities. Hence, failures in the
financial market will impair the performance of the entire
economy. He then plays with the question of whether government
should play a stronger regulatory role in the financial sector
than in other sectors.

To illustrate the difficulty of predicting financial
performance, he mentions the problem of the "asymmetric
information" condition in financial transactions. It is where
lenders are likely to have less complete information about
borrowers and the intended use of borrowed funds than borrowers
themselves.

Incomplete information is also a problem when implementing
monetary policy, according to Boediono. Policy makers have to
improvise while trusting their intuition and being continuously
pressed by time and the rapid flow of events. If policy makers
don't have enough information, spare a thought for the public. No
wonder then that the Indonesian public, as stated by Boediono,
tend to be suspicious of the stability of the government's
policies and the state of the economy.

In the chapters on banking sector reforms, most writers
concede the importance of prudent regulations to protect small
scale depositors, as well as partially control the flow of
capital. However, in the chapters on domestic and international
capital markets, Ross McLeod argues that the emphasis of foreign
borrowing should be placed on the soundness of the investments
for which the borrowings are intended. He also draws attention to
an interesting fact.

The sudden and substantial increase in Indonesia's foreign
debt burden which occurred in the latter half of the 1980s was
not caused by excessive government spending, either in absolute
terms or relative to the amount of its tax and other revenues. It
was caused by substantial appreciation of various currencies,
especially of the yen. And a large part of Indonesia's foreign
borrowings was and is denominated in yen.

McLeod suggests spreading borrowing over a range of major
currencies to minimize the exchange rate risk. Another suggestion
is to trade in futures, where Indonesia could buy yen futures to
protect itself from upward movements in the dollar price of yen.
If the time horizon for futures contracts is much shorter than
the maturity of Indonesia's yen borrowings, then it may be
possible to roll over or renew those futures contracts as they
expire.

On the whole, the book highlights the prevalence of finance in
every sector of Indonesia's development, as well as the optimism
that Indonesia is generally heading in the right direction. In
the meantime, the bulk of the population can only hope that the
nation's policy makers have a great deal of wisdom and fine
intuition, and do not make too many mistakes.

-- Dewi Anggraeni