Cambridge, MA, May 22, 2000.
Asia Wallstreet Journal
I AM AMAZED
Reading the ASWJ's editorial of May 15, 2000, "Indonesian Déjà Vu", I have to admit I am amazed at your strong suggestion for Indonesia to adopt a currency board, just as you did in 1998. I would like to make the following points:
- Your assumptions that " All it takes is a government willing to abide by the discipline they impose" as well as " If Mr Wahid is to succeed in restructuring the Indonesian economy, judicial system….." suggest to me that you took these 'requirements' for an effectively functioning currency board too lightly. You make it sound as if these are easy things to do, even though you argued that Indonesia's bureaucracy is largely incompetent. Despite his support for the central bank's independent status, the Bank Bali case during the Habibie administration, and the many abuses committed during the Soeharto era, show that government willingness to adhere to the required descipline can never be taken for granted. The idea of an 'auto pilot' in a fixed exchange system with a currency board is basically foreign to Indonesian authorities. In Indonesia, the propensity for anyone in power to tinker around with things can not be overlooked. In fact, this was the real reason why I 'quietly' opposed efforts by Soeharto and his cronies to introduce a currency board in February 1998. I haven't change my mind to this day, in spite of some improvements introduced by the new government. I also believe that a strong and reliable judicial system as an anchor is also a pre-requisite for a currency board to work properly - not the reverse as you seem to suggest. In my opinion, the currency board in Hong Kong works so well, aside from the fact that the Monetary Authority accumulates huge amount of foreign exchange reserves, Hong Kong has a very credible judicial system. As you are well aware, this is still a big problem in today's Indonesia. In addition, Bank Indonesia's holding of foreign exchange reserves is still much less than comforting.
- I don't agree with your assessment that Suharto was not serious about implementing a currency board. On the contrary, Suharto was very serious about fixing the rupiah to the US dollar and adopting a currency board. Towards the end on January or in early February 1998, without consulting me he instructed a small group of officials from Bank Indonesia and the Ministry of Finance to draft a new bill for its implementation. He also asked the leadership of Parliament to smooth the enactment process. Furthermore, he was very anxious to find a quick solution to the economic crisis -- which, in his perception, was nothing more than a financial or, to be more specific, an exchange rate problem -- so that he could move on with his political agenda: his re-election as president. I simply don't believe he used the proposal as a ploy to gain more time.
- Did the rupiah rebound in anticipation of a currency board? I am afraid this is the usual problem of 'post hoc ergo propter hoc' in economics. Just because the rupiah strengthened after the market learned that a currency board was in the making doesn't mean it actually stabilised the rupiah. That's because so much is required for a currency board to work effectively. You have to remember the market was so thin at the time that the sale of only a small amount of dollars was sufficient to move the rupiah upwards - even if it was only temporary. In any case, moves that raised the Rrupiah by 30 % came from some market players who didn't want to take losses because of their long dollar position and others who wanted to make a profit from the eminence of the government decision to fix the dollar to one half of the current rate (as it was rumored that the establishment of the currency board would go together with fixing the dollar rate to 5,000 rupiah from then rate of about 10,000 rupiah). I doubt very much the rupiah was rebounding because people in Indonesia fell in love with the currency board idea.
- My last point is a comment on your assertion that Indonesia's decision on this issue seems to totally depend on whatever IMF ( and the US Treasury ) has to say. With some claim to know a little better about these two entities, and of course about my own country, I think you're either giving too much credit or attaching too much blame to the IMF.
J. Soedradjad Djiwandono
Visiting Scholar, the Harvard Institute for International Development (HIID), Cambridge, MA and Professor of Economics, the University of Indonesia, Jakarta, former Governor of Bank Indonesia.
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