Longing for a new dawn (2)

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.