Strict policy needed in dealing with foreign funds

JAKARTA (JP): Indonesia should have a strong monetary policy in dealing with the harmful impact of the massive flow of foreign funds into the country, says Robert M. Stern, a senior economist of the United States.

Stern, a professor of economics and public policy of the University of Michigan, said yesterday that establishing a strong monetary instrument would be more affective than engaging in joint forces with other nations.

Speaking at a discussion on economic trends in the Asia- Pacific region held by the United States Information Services, Stern said central banks of rapidly growing countries, now becoming popular targets of global fund managers, should be equipped with a strong policy to enable them to counter the possible rush of foreign funds.

Stern was in Jakarta to address a seminar on challenges and opportunities of free trade in services jointly held by the Indonesian Economists Association and United States Information Services on Thursday.

In yesterday's brief discussion, Stern said that at the current situation, in which most of the world's major financial agencies have been electronically integrated, global fund managers are more encouraged to switch their funds from one country to another for a higher return.

However, besides giving additional capital, more integrated financial markets could cause troubles to the receiving country, like that hitting Mexico last year, he said.

The massive rush of foreign funds from Mexico, which nearly paralyzed the country's economy, also affected Taiwan, Hong Kong, Indonesia and other Southeast Asian nations, causing a sharp depreciation of their currencies against the world's major foreign currencies.

The sequential impact of the financial crisis to Asian countries lasted for nearly a week, forcing central banks in the region to hold a meeting to jointly solve the problem.

Impact

Stern, who has published various books on international commodity problems, comparative advantage, price behavior of international trade, balance-of-payment policies and computer modeling international trade and trade policies, said that the impact of the massive rush of foreign capital could be severer when the liberalization of financial services, now in its early stage, is fully implemented, if the central bank can't effectively regulate the money in circulation.

He also warned that domestic banks have to upgrade their workforce and technology to enable them to compete with larger banks from overseas, which, in the era of globalization, will no longer face barriers in entering Indonesia and other restricted developing countries.

Stern said that the liberalization of financial services would be very costly to financial institutions in the developing world but would give a greater advantage to customers.

He said that local banks should, therefore, be able to satisfy their customers if they want to survive in the tight market.(hen)