Longing for a new dawn

By Djisman Simandjuntak

This is the first of two articles on the Indonesian economic crisis.

JAKARTA (JP): The past five years of Indonesia's economic development will be shelved in history as a mixture of extremes, namely a roaring boom for the first four years and then an epilog of a grievous meltdown.

More than nine months since its eruption, the financial crisis is yet to subside. The tinkering with technical instruments in the absence of an unequivocal commitment to reform was proven disastrous, as has been the swaying between the IMF adjustment program and the plan for a currency board system.

What is left of the rupiah is now less than one-fourth of its precrisis dollar value. Prices have skyrocketed. The real income and wealth of Indonesians are being sheared by rampant inflation. Employment has shrunk. Though improvement is taking place in the balance of payments, the stock of total external debt has swollen to roughly 300 percent of the GDP.

What is more, confidence has been broken on the side of both consumers and producers. Arguing that business is absurd under the current exchange rate, corporate leaders are trapped in an agony of helplessness. President Soeharto's cabinet will have to embark on this five-year term with financial distress.

Looking back briefly, a solid financial reputation is yet to be crafted by Indonesia. Even the New Order's commitment to financial prudence has notoriously been lethargic as well as sporadic. Using 1990 as the base year, Indonesia's consumer price index had risen by a factor of more than 50 between 1967 and 1995 compared to only less than three in the case of Malaysia.

Financial instability has been perceived as an endemic disease of Indonesia. Prior to the current crisis, Indonesia was faced with a worsening imbalance, which was obscured inside the then uncontrolled growth fetish. The contagion from Thailand was only a trigger.

Just before the crisis erupted, the rupiah was overvalued. The economy was suffering from a lending boom. Bank Indonesia's monetary targets were consistently exceeded by a high margin.

When the boom-associated bubble burst, the very existence of commercial banks was threatened, forcing the government to issue a basically unconditional guarantee in favor creditors of all locally chartered banks. The private sector's external borrowing was literally exploding. Investment in nontradable sectors such as electricity generation and toll roads, and industries such as telecommunications, air transportation, broadcasting, petrochemicals, basic metals and real estate, which primarily cater to the domestic market, was rising by leaps and bounds. The import boom followed suit.

On the other hand, investment in exports was nosediving, leading to a decelerating of exports. The current account gap was widening. The surplus in the balance of payments was debt-driven.

In hindsight, it was found that measuring the adequacy of foreign exchange reserves in terms of import coverage was fundamentally flawed. As a fraction of the sum of bank notes, demand and time deposits and saving Indonesia's foreign exchange reserves had dwindled even before the crisis.

When the exodus of portfolio equity took place and debtors were denied rollovers, panic swept over the financial system. How could these cracks of economic fundamentals have escaped the attention of economists in government, research institutions, the IMF, the World Bank and globally renowned investment houses?

The puzzle is yet to be deciphered. Nonetheless, there are some footprints of history in the enigmatic boom that one can scrutinize while searching for an explanation. They suggest that the crisis as a belated eruption of the cumulative hazards emitted over an extended period of time by a substandard governance.

First, governance of the financial system is based on pragmatism rather than transparency of a meticulously codified set of principles and rules. This disease of pragmatism is prevalent in the one-time miracles of Asia, including Japan. It oftentimes serves as a sanctuary for collusions.

In a fairly large number of cases, investing hard-earned savings in the liabilities of Indonesian banks is akin to betting in a casino. One is never sure of the risk involved in such an act.

Second, Indonesia's financial system was insulated for a very long time. Portfolios of foreign banks was restricted with the purpose of shielding local banks against head on competition with foreign banks.

Notwithstanding a perennially poor performance, the merits of protecting local banks were taken for granted. This inward- looking policy was a global disease.

What matters, therefore, is the relative speed of opening.

Third, corruption is a recurring evil in Indonesia's financial services industry. The public has repeatedly been caught by surprise to learn that an immense amount of banks' wealth has been misappropriated by owners, employees and borrowers, jolting the fragile confidence in financial governance even more.

This disease is not confined to financial governance. Those who recently referred to nationalism and dignity while voicing criticism against the IMF program should be mindful that corruption is the surest way to humiliate, if not to eradicate a nation.

Fourth, law enforcement is notoriously weak. Big financial scandals are rarely investigated thoroughly, and heavyweight swindlers have been able to escape a proper trial.

Fifth, governance of the financial system is as concentrated as the general governance. The Ministry of Finance is charged with the conduct of fiscal policy, the supervision of the capital market and the control of a large number of state enterprises by way of formal ownership.

Likewise, Bank Indonesia's mandate extends to the conduct of monetary policy, the supervision of commercial banks, the running of clearing services and the discretionary provision of liquidity credits, even to nonbank recipients.

Sixth, power is highly concentrated in the management of financial institutions. All major banks are headquartered in Jakarta. Each of the majority owners of banks are largely incontestable in respect of strategic business decisions.

Many of them are linked to nonfinancial businesses through a complex web of a controlling ownership. Competition in banking is fought on material gimmicks rather than safety-enhancing disclosure.

The writer is executive director of the Prasetya Mulya Management Institute.