Longing for a new dawn (2)

By Djisman Simandjuntak

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

JAKARTA (JP): At this juncture in Indonesian history a warning is in order: Some crises do culminate in extinction. Ancient civilizations around the Mediterranean sea disappeared forever as a result of catastrophic events.

Even if not causing absolute destruction, recovery in the aftermath of a crisis can take considerable time. Latin America is a case in point. So too is the Philippines, which has yet to recover from the damage caused by Marcos' dictatorial reign.

In other cases, survivors have risen phoenix-like out of the ashes of crisis to turn disaster into triumph, like in contemporary China for example.

To join this third group of blighted countries, who have used crises to improve their situations, Indonesia will first have to bring the current crisis under control. However, financial crisis are notoriously difficult to control and the stakes of failure are very high.

Options are limited and time is precious. Indonesia is "caught between the devil and the deep blue sea" to quote an old proverb.

Choosing between the IMF program and a currency board is of secondary importance to speedily crafting credibility, which is of the utmost importance. Under the current circumstances, this requires a huge financial cushion, rescheduling of external debts, restructuring the commercial banking sector and ending sub-standard governance.

The necessity of these steps brings Indonesia inevitably toward the IMF program, redesigned or otherwise, as the only realistic option and the one which offers the greatest chances of success. It is wrong to argue that the IMF option is flawed because it failed to immediately bolster the rupiah.

At the same time as steps are taken to bring the crisis under control, a review of financial governance will have to be undertaken and reforms developed. After the crisis Indonesia must not merely return to "the old good days".

The only dividend that can be wrought from a crisis is change. The challenge is essentially to transform the Indonesian financial services industry into an entity with global congruence.

This can be done in two ways. The first is to reform the financial system and allow the central bank to determine monetary policy at its discretion. Exercised wisely, such policy has worked well in countries like Germany and the United States.

Under this system, Bank Indonesia's discretionary decisions would be tightly controlled by an explicit performance contract with the people of Indonesia.

Adherents of free banking who criticize this system seem to have overlooked the fact that even under a completely free banking system, discretion is not going to disappear. It will survive in the hands of private bankers.

Indonesia needs to boost its credibility and this new system could be used to this end. Assuming inflation can first be brought under control, a reinvented Bank Indonesia can improve its credibility by adopting realistic inflation targets.

The second option would be free banking. Rather than the monetary authority's discretion, market forces will determine the supply of money based on prevailing demand. Restrictions on entry will be removed and banking will become just another business. Each bank will have the right to issue its own money, which will compete for reputation with money issued by other banks.

In early days banking was conducted in this way and more recently, financial economists have once again begun to view the system as promising. Assisted by computer networks, free banking may be reincarnated in the not too distant future. Even a currency board can be seen as a variant of free banking, in so far as the monetary policy content of the system is concerned.

However, one must be cautious of jumping prematurely from a regulated banking system to free banking. Introducing free banking into Indonesia under the current circumstances would end up in disaster and existing Indonesian banks would be crushed indiscriminately.

The first option is only a possibility if governance is improved. Insulating Bank Indonesia from outside interference and political decision making is fundamental for success.

So good governance is the key. Governance must be undertaken with full respect to variation. As Stephen Jay Gould puts it, life's grandeur is variation. Central tendencies such as averages and means are illusory. Every individual component counts.

From a common ancestor, the human race has branched into a diverse species which has invented a system of society anchored around a set of values including political freedom. Yet, within this system individuality and variation is still allowed to flourish.

Religions are also tolerant of variation. In Christianity, a myriad of denominations have emerged from a single stock.

Great variation exists in the material world too.

The essence of progress, in other words, is a search and respect for variation. Governments must therefore be open and receptive to the outside world rather than isolationist, efficient rather than wasteful, aware of complexities rather than over-simplifying, transparent rather than enigmatic, decentralized rather than centralized, and truthful rather than propagandistic.

Transition to this type of governance will take time and leaders with specific qualities are required to oversee the process. Are President Soeharto and Vice-President B.J. Habibie the people who will lead the world's largest archipelago into the new era of pluralism?

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