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