NEW DEVELOPMENT PARADIGM :
WHAT IS AFTER CRISIS ?

By : J. Soedradjad Djiwandono
Gurubesar tetap Ilmu Ekonomi, Universitas Indonesia


A Pointers for a presentation at A One Day Seminar on Business, Economy and Finance: Indonesia's Road to Recovery, organized by PERMIAS, Clausen Center for International Business and Policy and International and Area Studies, University of California at Berkeley, March 27, 1999.

-oOo-

INTRODUCTION

  • Observing recent developments in Indonesia, I find it is difficult for me to join the optimism of those who are convinced that the worst is over and that Indonesia will soon be on the road to recovery. The crisis in Indonesia has involved practically every aspect of people's lives, not just financial or economics. The latest social unrest and killings on top of the shaky preparation for the upcoming election have not been encouraging. For me, the most pressing issue for Indonesia at present is stills how to end the crisis, which has been creating so much social dislocations and human suffering. Financial and economic problems are enormous, but they are relatively more tractable. But, social and political issues are still more serious. In such a situation, efforts to stop the downslide has to start from the presence of a legitimate national leadership, who has the credibility and ability to galvanize support from all parties within the society and cooperation from the outside to deal with the multi faceted problems. The upcoming general election and the election of the President, if conducted in the true spirit of democracy, could become a sound basis toward a new development.

  • After we survive the crisis, a new mode of development has to emerge for Indonesia, lest we will be back to suffer from similar upheavals, social dislocation and all other social and political malaise which have been effecting Indonesia during the crisis. Indonesian society after the crisis has to be a transformed society free from past mistakes that brought down our economic, social and political fabrics. This is what a new development paradigm is about. I would share with you my view about a new development paradigm, with a view to different proposals about varieties of reforms in finance, economic and development. I would also make some notes about a new Indonesia that should come out from what we learned about the crisis.


THE NEED FOR A TURNING POINT

  1. The first priority for Indonesia at present is freeing itself from the crisis that has no longer been solely a financial or economic crisis, but a crisis involving practically all aspects of people's lives. World Bank (WB) President in his speech at last year annual meeting of the WB and IMF talked about a human crisis, a crisis which is beyond financial and economic. What has happened in Indonesia since mid 1997 to the present in finance and economics, social and politics ultimately had some bearing in human suffering. Pulling out from the crisis is the first priority. It has to start with a turn around from a slide down process that has hit Indonesia for more than a year and a half now. A turning point cannot come out from economic measures, especially since all parties in the market are holding a position of 'wait and see'. Problems of political stability, legal protection and safety have to be addressed first, before normal economic activities could resume.

  2. The present government, the legislative body, the judiciary and the military have loss most of their credibility. For the present national leadership to have credibility in pushing social, political, and economic reforms, they should, from the start, demonstrate a strong signal of their commitments. Market is extreme and demanding. Of course it is impossible for any government to provide all the social and political as well as economic infrastructures that were disintegrating due to the crisis. But, a positive perception is important here. Market perception has to be brought to change to a positive one. There should be a strong signal to be away from old practices of crony capitalism toward a new paradigm of transparency, good governance, law and order, etc. It has to start with a turning around of people expectation toward a better prospect. Korea and Thailand path of recovery started with a turning point. Both countries had new governments that could change market perception for the economy and the country to pull out from the crisis. Only if the national leadership could produce a turning point that it could expect public trust and support, for the long, arduous and hard works toward recovery to follow. Starting with a positive perception, then good programs should follow. This is what I mean by getting out of the crisis first.

  3. I put the point above as a reminder that, before we talk about a new paradigm for development, a new international financial architecture, or a holistic approach for development, the highest priority is still how to get out of the crisis. And how to get out of the present crisis depends on resolution of problems outside economics, like the presence of a credible government, public safety and protection of basic human rights. Inside economics, high priorities fall on basic problems, like how to deal with problems of food distribution and some other social safety net issues. But, this does not mean that we should shy away from discussing what to do after crisis. Which is what I would like to touch now.


@ Professor of Economics, the University of Indonesia, Jakarta, currently a Visiting Scholar at the Harvard Institute for International Development (HIID), Cambridge, MA.

TOWARDS A NEW DEVELOPMENT PARADIGM

  1. Some more formal arguments have been launched to design new frameworks or strategies for development as lessons that people learn from the recent crisis. President Wolfensohn of the WB in his speech at the last annual WB-IMF Meetings in Washington DC made a proposal for a holistic framework that sharpen strategic vision as a new approach of development. First, addressing the crisis by creating economic structures that could manage crisis to be less frequent and less severe, designing effective ways of responding to crisis and addressing safety nets problems. Second, adhering to a development framework in its broadest sense that includes good governance-transparency, regulatory and institutional fundamentals for workable market economy, policies that foster inclusion-education for all, public services and infrastructure necessary for communication and transport, and ensure environmental and human sustainability. (James D.Wofensohn, The Other Crisis, Address to the Board of Governor, Washington, DC, October 6, 1998).

  2. The Communiqué of the Interim Committee of IMF last year adopted a report made by a working group formed by 22 Finance Ministers and Central Bank Governors on a proposal for Strengthening International Financial Architecture, by designing internationally accepted standard, transparency, strengthening financial systems, promoting orderly integration of international financial markets and involving private sector in the prevention and resolution of financial crisis. This is a proposal to strengthen financial system on the aftermath of the crisis.

  3. Similar proposals to address problems arising from the weak financial system revealed by the recent crisis have come out from academicians. Started with criticisms on how the Bretton Woods Institutions, IMF in particular, handled the Asian crises, many proposals had been circulated to change their approaches toward economic crisis and development. Critics against IMF handling of the Asian crisis have been well documented now. Familiar names like Jeffrey Sachs, Paul Krugman, Joe Stiglitz, Martin Feldstein, George Schultz, and many others have been very vocal in their criticisms on how IMF supported policies to the crisis countries have been more contributing to than mitigating Asian crisis. Some, like the two former US Secretaries of Treasury, Schultz and Simon, would even argued for closing the institution. Similarly, there are many studies proposing the path of reform of the present financial system to accommodate new phenomena in global finance, in particular the increasing role of short-term capital flows.

  4. Internally, both the WB and IMF also conducted studies, suggesting steps for improvement or reform of their respective role in assisting member countries in coping with problems of economic crisis and development. The IMF issued a report IMF-Supported Programs in Indonesia, Korea and Thailand: A Preliminary Assessment, defending its role in these countries. While the WB issued a critical evaluation of its involvement in Indonesian development in the last many years, in a report entitled Indonesia-Country Assistance Note. Similarly, more specific proposals have also been circulating, like one on the need for international lender of last resort by Stanley Fischer or techniques of exchange rate management by academics at the Institute for International Economics.

  5. Among many proposals on new approaches for development, the one suggested by Joseph Stiglitz, in his Prebisch Lecture delivered in Geneva, October 19,1998 entitled, Towards a New Paradigm for Development: Strategies, Policies, and Processes, deserves to be carefully studied. In the paper he reminded something very relevant for Indonesia's future development, namely that an economy needs an institutional infrastructure. Stiglitz argued that development represents a transformation of society, a movement from traditional relations, traditional ways of thinking, traditional ways of dealing with health and education, traditional methods of production, to more 'modern' ways. A successful development transformation affects not only what we do, but how we do it, it affects the strategies and policies, as well as the processes. I think we could use this framework to assist us finding a new paradigm for Indonesia's development.

  6. We have seen the evolution of approaches or theories in development; from growth theory to growth with equity, up to the recent dogma of focusing on adjustment policies for the functioning of market economy. In this approach of development, the guiding principles have been the so-called Washington Consensus, with the dictum of liberalization, stabilization, and privatization. But, following this dictum blindly or unintelligently may result in some disappointments, like confusing means with ends, which could be costly. The Indonesian experience in liberalization policies, I think, had this downside. Many of us thought that "deregulasi" is an ends itself, not a means. After the crisis, we observed proposals to liberalize prudently, or that liberalization in financial sector has to be accompanied or even preceded by robust financial infrastructures. Also to include the private sector in designing program to cope with financial crisis is a new thing that comes out only after the bad experience (for not including the private sector) in the crisis. I could cite our experience in some trade and banking liberalization policies in late eighties and early nineties as our share in this confusion, with some adverse effects that Indonesia had to bear. Similar problem arose in privatization policy. Privatization and trade liberalization are means to pursue a more sustainable, equitable, and democratic growth. They are not ends in themselves. Strengthening banking system is part of economic fundamentals for economic stability, as we believe that prudent fiscal and monetary policies are. A failure to understand the subtleties of the market economy and concentrating almost exclusively on getting prices right, is not enough to make a market economy work. The weakness or absence of financial, social, legal and political infrastructures were never seriously considered as necessity for a market economy to function as promised. These should be part of the mea culpa for so many parties in Indonesia (myself included) as well as many parties abroad, including the Bretton Woods Institutions.


1Charles Adams et al, International Capital Markets: Development, Prospects and Key policy Issues, (Washington DC: IMF), September 1998.

CONCLUDING NOTES

  1. To be able to concentrate on what to do after crisis, we have to get out of the crisis first. But, we need a turning point to transform the perception that is full of uncertainties and the malaise to a positive one. Indonesia needs a national leadership who received full support from business community and the public to mobilize assistance and cooperation from foreign creditors and investors with the help from industrial countries and multilateral agencies.

  2. The upcoming general election and election of the President, if conducted in a true democratic spirit, fair and transparent, would produce a legitimate government that could credibly provide a leadership for Indonesia to get back to development. But, as our experience with unintelligent implementation of liberalization and privatization policy for the working of market economy, we should not confuse between means and ends in practicing democracy through election. Conducting election with all the requirements for a true practice of democracy, open and fair is of the highest priority. But, this is not an end itself. It is a means to form a government that could lead Indonesia to face new challenges and opportunities in a new era of economic, social and political system commensurate with its place in a global system.

  3. In the meantime, in the economic sector the priority is to implement the social safety net programs efficiently to guarantee for reaching the targeted groups. Within the economic and finance proper, the banking restructuring and capitalization have to be conducted with minimal consideration and intervention from political interest groups.
    The recent government policy to close 38 banks and to take over a number of banks have to be consistently and firmly executed, to mitigate public suspicion of the presence of political favors which the public alleged around the time the policy was announced. This is definitely a positive step, but it still has to be followed by other steps the market is expecting. The market is expecting for actions to deal with the state banks, (the finance companies?), as well as the building and strengthening of financial infrastructures. Banking restructuring is very crucial, but it cannot be done in isolation. Corporate sector restructuring has to be addressed properly in conjunction with banking restructuring.

  4. With a view to areas for reform in international financial architectures, the future of Indonesian finance has to aimed at some compliance with requirements for international accepted standard, transparency, strengthened financial system, orderly integration to international financial market and involving private sector in preventing and resolution of financial crisis.

  5. My last point is a note to remind all of us, Indonesian, as individuals involve in varieties of profession; corporate personnel's, government officials, academicians and others. It is my observation that we have been living beyond our means, and thus, to stop living beyond our means should be a part of the new paradigm of Indonesian development. Even though our national saving rate has not been bad, we kept having problem of financing S-I gap. Indonesia has to address the problem of S-I gap, from both the expenditure as well as the saving side. Corporations have to reduce the habit of being highly leveraging since corporate debt to equity ratio in Indonesia has been notoriously very high. Individually? The same. I could even say that this has to be done in our public lives. The root of corruption, collusion and nepotism is a way of life that based on living beyond one's means. Every Indonesian has to learn to be proud of earning what he or she gets, whether it is material well being, power or knowledge. Being rich is not wrong if you really earn it, and not through some short cut method, like corruption. I could extend this notion in other aspects of our lives, which in essence signify the meaning of living beyond one's means.

Cambridge, March 24, 1999.
JSD.


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