SOME NOTES ON POST CRISIS DEVELOPMENT OF INDONESIA

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


A paper presented at the conference "Two Years of Asian Economic Crisis: What Next?" organized by the Woodrow Wilson Center Asia Program, Washington DC, September 22, 1999.


INTRODUCTION

The Indonesian crisis which has gone for more than two years and has implicated many aspects of people's lives, not just financial or economics, but social and political as well. But, there has not been a clear signal that the economy is really heading toward a recovery let alone a sustainable balanced and broad based development. Actually, since the much better than expected general election of June 7, there had been encouraging developments in the Indonesian economy as well as social and politics. Macro indicators' development had been toward the better. Both due to the good harvests in 1999 as well as a positive market reaction towards a better than expected political development arising from good political development.

Most people seem to agree that the crisis had, generally been behind us, as for example reported at the Interim Committee Meeting of the International Monetary Fund (IMF) of last spring. In the three hardest hit countries in Asia it was reported that Korea was experiencing a recovery, the Thai crisis was bottoming out and that Indonesia was following. Brazil was reported to be out of the crisis, while Russia was close to having a new IMF supported programs

However, at least for Indonesia, this did not last long enough to support a more sustained path toward recovery and growth. The latest developments in Indonesia, and to a certain degree also Thailand had raised some new concern.1 The still very fragile recovery in some crisis countries had already facing new problems arising from the expectation and ultimately the actual interest rates hike in the US and the new fear of Yuan devaluation. In Indonesia, the good news about a much better than expected general election has been tainted with Bank Bali scandal and the atrocities in East Timor, which immediately put pressures on the rupiah as well as equity prices.

The latest development in Indonesia is like a relapse in a sickness. After a brief period of encouraging development that led to some hope for recovery at present Indonesia is back in a crisis. And again, it needs a turning point for a recovery to that could lead to sustainable development with a broad base, more equal kind of development in a more democratic system governing economic, social and political lives. After Indonesia successfully out of the crisis, a new mode of development has to emerge for Indonesia, lest it will be back to suffer from similar upheavals, social dislocation and all other social and political malaise. Indonesian society after the crisis has to be a transformed society, free from past mistakes that brought down our economic, social and political fabrics. Indonesia has to transform itself in a new development paradigm.


THE CRISIS AND ITS IMPLICATIONS

  • As the crisis has been going on for more than two years by now, policy responses to the problems and market reactions, including their feedbacks could be high lighted better with benefits of hindsights. Some comparison could also be drawn from experiences in different countries in Asia. It should be noted here that even though we tend to treat problems in the crisis countries as similar, they are not identical, since each crisis has its peculiarity. Indonesia could be taken as an example of a country, that despite its relatively better conditions as well as better earlier policy response ultimately becomes the worst case of countries experiencing crisis. It is definitely the worst case in the crisis and it is the slowest in its path towards recovery as well. At present it is the only one experiencing a relapse of crisis.

  • The virulent nature of the Indonesian crisis has been well documented and includes the followings;

    1. In one single year of 1998 the economic deterioration was so devastating. It was demonstrated by statistics that included the followings; a drastic reversal of a long period of high growth rates of GDP, from 7 to 8 per cent annually to negative growth of close to 14 per cent, a cut of income per capita in dollar terms into a half, a very sizable amount of reversal in private capital flows - the estimates range between $25 to $ 40 billion - high jump of inflation rate from a single digit to 80 per cent, and a worst depreciation of rupiah since the Great Depression of 80 per cent.

    2. The crisis has been so virulent that the social and political impacts have been so devastating. They include a drastic increase of unemployment, especially in urban areas of Jawa - some estimate put a figure of more than 5 million additional people unemployed - a drastic increase in people living below poverty line from 11 per cent to close to 25 per cent of total population in 1998, a drastic increase in school drop outs at all levels of schooling, increasing rate of petty crimes and prostitution, and other social problems.2

    3. Aside from all the horrors that have been reported to happen in Ambon, West Kalimantan, East Timor, and other places, there have been indications for process of social disintegration. Aside from the infamous riots that caused the death of more than eleven hundred people plus the burning of houses, looting and rapes of May 1997, Crosby Corporate Advisory reported that in 1998 there were nearly 2,000 student demonstrations; 1,300 rallies by non-government groups; 500 strikes; and 50 riots.3

    4. The crisis had forced Suharto, who ruled the country for thirty-two years, to resign in disgrace. He was succeeded by his close protégé Dr.Habibie, who has been serving as President since May 21 1998.

  • The Indonesian crisis originated from an ordinary currency problem, when the rupiah suffered from sudden pressure in July 1997, after the floating of the Thai baht in early July 1997. It was a part of the regional financial panic in the Keynesian sense. However, after a sequence of policy responses by the government and market reaction there after the problems spread rapidly and deeply to effect all sectors of the national economy, before finally impacting politics.4

  • Among Asia's crisis countries Thailand, Indonesia and Korea all went to seek for IMF supports, while other countries in Asia did not. Malaysia proceeded in facing the crisis on its own included resorting to capital control, even though before being sacked Minister of Finance Anwar Ibrahim was known for subscribing stringent policies of the IMF tradition. Meanwhile the Philippines had been on precautionary arrangements with the IMF for some time.


    Stand-by loans to crisis countries in Asia
    (In US$ billions)

    Country IMF Multilateral Bilateral Total Disbursement

    IMF Others Total
    Thailand 4.0 2.7 10.5 17.2 3.0 9.2 12.2
    Indonesia 11.2 10.0 21.1 42.3 6.8 1.3 8.1
    Korea 21.0 14.0 22.0 58.4 18.2 9.0 27.2

    Source: IMF, IMF-Supported Programs in Indonesia, Korea and Thailand: A Preliminary Assessment, January 1999 (mimeo).

  • Before going for IMF support all the three countries had been dealing with strong pressure on their respective currency by resorting to their own means of foreign exchange management. The three countries started their defense against the currency onslaught by way of market intervention in the foreign exchange market in line with their adherence to foreign exchange management with a pegged system, either a rigid pegged system for Thailand and Korea or a managed floating system for Indonesia. After loosing substantial reserves in market intervention, in particular for the first two countries, one by one the three countries abandon their basically pegged system, and change their foreign exchange system to a floating one. But, when market confidence was shaken, one by one these countries went to seek for IMF support in their effort to restore market confidence.

  • In general, IMF supported program contains adjustment policies that a country promised to take for dealing with imbalances from a shock or crisis. Since the Asian crisis is multifaceted, reflecting varieties of problems and weaknesses, a sustainable program to effectively addressing problems of crisis must comprise of several aspects also. There have been a lot of criticisms on the IMF handling of Asian crisis. The general criticism is that Asian crisis is not a typical problem that IMF was set up to deal with.

  • There are slight variations in each country, but generally the IMF-supported programs adopted to face the crisis comprise of financial reform and economic restructuring complemented with prudent monetary and fiscal policy. The classic IMF approach is of course monetary and fiscal policy to address monetary instabilities, like inflation and balance of payments as well as fiscal imbalances. But, dealing with problems in economic structures, like monopolies and oligopolies and practices of crony capitalism, granted that these are real issues in these countries, have raised controversies. And addressing problems of banking restructuring as well as corporate debts also managed to draw some criticisms. As one should also acknowledge, in all these cases the Fund had been working together with its sister institution, the World Bank (WB) as well as the Asian Development Bank (AsDB) so that they could mobilize a pool of expertise to deal with these complex problems.

  • Since the problem facing these countries is basically one of market confidence, the presence of these multilateral agencies supporting these countries is very crucial. They have to show their support of these countries' adjustment programs with their expertise as well as the availability of funds, both in term of the magnitude and its readiness to be drawn. Hence, the Emergency Financial Mechanism (EFM) and its huge magnitudes.5

  • In general Asian countries did not suffer from problems of budget deficit, hyperinflation or even chronic balance of payments' deficits. But, the IMF therapy, at least the one usually highlighted, is tight money policy with sky-high interest rates. There is some validity in the IMF critic, even if not entirely. However, among the many factors causing or contributing to the crisis in Asia, the common important elements are that these countries have been facing problems of weak banking or financial system and unsustainable corporate short-term debts in foreign currencies. For this any stabilization and recovery program will not be effectively solving the crisis unless seriously addressing these two problems. For Indonesia, since the crisis has become a multifaceted crisis with dynamic feedback effects in a complex inter-relation between sectors, financial and economic recovery could only come out after a positive development in the Indonesian political system could produce a turning point for a more sustainable process of recovery and beyond.


LEARNING FROM CRISIS : Towards A New Development Paradigm.

  • Even though discussions on different approaches to deal with problems in specific policy areas have been going on for some time, it is the recent crisis that has become the 'wake-up call' for governments and monetary authorities of many countries as well as multilateral institutions to be more focus on new strategies or approaches on various aspects of development. Studies on banking crisis and banking soundness for macroeconomic policy by IMF and WB staffs had started in 1991. However, it was only after the mid nineties that these studies were getting more explicit on the need of more integrated approach of micro and macro aspects of economic policy due to a better understanding about the close link between soundness of banking system and monetary management.6In economic development a holistic approach has also been emerging.

  • Stiglitz argued that development represents a transformation of society, a movement of traditional relations, traditional ways of thinking, traditional ways of dealing with health and education, traditional methods of production, to '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 process. He reminded something very relevant for Indonesia's future development, namely that an economy needs an institutional infrastructure.

  • We have seen the evolution of approaches or theories in development; from growth theory (50's and 60's) to growth with equity (70's), up to the recent dogma of focusing on adjustment policies for the functioning of market economy (late 80's and the 90's prior to the crisis). In the most recent approach of development, the guiding principles have been the so-called Washington Consensus, with the dictum of liberalization, stabilization, and privatization. With the benefit of hindsight, most writings after the emergence of the crisis argued that there are requirements to be fulfilled for the implementation of the Washington consensus to be effective. Some would even argued that the Washington Consensus is not right. What could be said here is that, trusting the Washington consensus dictum blindly like a true believer or implementing it unintelligently could lead to confusing means with ends with costly implications, as some crisis countries had attested.

  • The Indonesian experience in liberalization policies, I think, had this downside. Many Indonesian , during the heyday of liberalization drive would take almost for granted that "deregulasi" is an end itself. The crisis showed us clearly that our banking liberalization was not executed intelligently. And we have to pay dearly. Of course, after the crisis, there are writings, IMF staffs' included, belatedly advising to liberalize prudently, or that liberalization in financial sector has to be accompanied or even preceded by robust financial infrastructures. Similar problem arose in privatization policy. Privatization and trade liberalization is 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.7 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 could be part of what one learns from the crisis , policy responses as well as market reactions to them.

  • The recent crisis has revealed structural weaknesses of, not just Indonesian financial infrastructure, but also social and political infrastructure. These weaknesses made Indonesia the worst crisis country. Indeed, it has been argued by many that Indonesian path of development has left out institutional development. A robust infrastructure in economic, finance, social and politics has to be part of the new paradigm for Indonesian development. One very important aspect of this problem is the weak legal system in Indonesia. A combination of structurally weak legal system and a concentration of power on the executive branch (the President) of the system of government has caused resolution of banking or financial disputes through legal action ineffective. Strengthening economic, social and political infrastructures has to be part of the national effort to build a new paradigm of Indonesian development.

  • The recent crisis shows us that in spite of a relatively high rate of national savings, Indonesia has been living beyond the means that made development process unsustainable. 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 highly leveraging. Corporate debt to equity ratio in Indonesia has been notoriously very high. For a sustainable development financing has to be done within the national means. This does not mean that borrowing should be avoided, but it should be conducted responsibly.

  • We may even argue that the root of corruption, collusion and nepotism is a way of life that is based on living beyond one's means. Corruption, collusion and nepotism that are rampant in the deep-rooted crony capitalism of Indonesia are involving two parties, the recipient and provider. Both parties have to be uprooted from Indonesia's process of development. Meritocracy and transparency should replace these practices.


FINANCIAL SECTOR

  • Aside from different views about causes of the crisis, experts seem to accept that the crisis is due not to a single factor, but multi causes. In general people also in agreement that there are two related factors that are crucial in the economic crisis of Indonesia, namely the large size of corporate debts, short-term in particular, and the weakness of the financial sector, banking in particular. Due to the strategic position of banking in the Indonesian economy, bank restructuring, including bank closures and recapitalization as well as strengthening banking infrastructures, is very crucial for the economy to move out from the crisis. However, since corporate debt, both external and domestic, is very much a part of the problem, it is not proper to discuss bank restructuring without addressing issues and problems of corporate debt restructuring. I look at bank restructuring in a broader context, the way Claessens defined.8 Restructuring, he wrote 'refers to several, related processes: recognizing financial losses; restructuring financial claims; and operational restructuring of corporations and banks. In cases of systemic restructuring, in tandem with these restructuring processes, the institutional framework for the financial and corporate sector undergoes major changes'


Problems and prospects of bank restructuring are partly determined by the nature of the national debts, which for Indonesia includes the followings:9

  • Indonesia has been a high debt country for sometime, and it will even be more so after the crisis. With no debt repayments and new loans from multilateral institutions recently, the national debt is naturally rising. The Economist Intelligence Unit (EIU) put the Indonesian stock of debt by 2001 to be around $175 billion.

  • Since the beginning of the nineties the national debt has been increasing very rapidly, mainly due to a very rapid increase in private sector indebtedness. From 1992 to 1997 the government debt increased by five billions dollar, from $ 55.5 billion to $59.9 billion. But, the private sector debt went up from $28.2 billion to $78.1 billion, or an increase of fifty billions dollars. One half of the private sector debt increase occurred between 1996 and 1997.

  • Different from Korea and Thailand, the external exposure of Indonesian banks is relatively small, less than 10 per cent of total exposures. This suggests that corporate sector exposures are mostly direct loans from foreign banks and other financial institutions.

  • Corporate sector's exposures are mostly in foreign currencies (dollar). Even their exposures to domestic banks are fifty per cent in foreign currencies. In June 1998 out of $118 billion of total corporate debts ($ 67 billion external and $51 domestic), 74 per cent is denominated in US dollar.


Problems and prospects of debt restructuring:

  • The sovereign debt is increasing due to the recent additional loans from the multilateral institutions in the context of stand-by arrangement and loans for financing social safety net programs. Indonesia was granted a rescheduling program for some debts that were due last year through the Paris Club. But, issues on the sovereign debt have to be addressed at some point in the future.

  • A World Bank report on corporate debt restructuring in Indonesia identifies vulnerabilities of corporate debts in Indonesia that include the followings: There are ten big companies with strong ties to the banking system that own more than 50 per cent of market capitalization of Indonesia's corporations. These companies also have close ties with the Suharto family. Corporations are highly leveraging. A substantial part of corporate borrowings is denominated in foreign currency (even domestic borrowings), unhedged, and short- term.10 In addition, a large portion of loans is used to finance speculative investments in non-tradable projects, like properties. These make corporate balance sheets extremely vulnerable to sharp depreciation of rupiah and fluctuation of interest rates.

  • The fact that Indonesian banks' exposures constitute a minor part of the national debts turns out to be a complicating factor in debts restructuring. Why? Since corporations constitute the major part of the national debtors, debt restructuring has to involve a large number of entities. From the debtor's side there are more than 2000 corporations involve in foreign debts. The creditors are banks and other financial institutions; Japanese banks take the lead, followed by European, Korean and a small number of American and other banks. Altogether they are in hundreds. This is different from the Korean or Thai case.

  • It is curious to compare corporate debt restructuring in the three crisis countries. Thailand addressed problems of short-term debts very early at the beginning of the crisis. Korea did the same thing. Both countries resorted to debt restructuring rapidly. In fact, in both cases the IMF dealt with corporate debt problems from early on as a part of IMF-supported programs. This has not been the case with Indonesia. Even though the crisis hit Korea later than it hit Indonesia, the debtors and creditors agreed upon a framework of corporate debt restructuring much earlier in Korea than Indonesia. In the case of Indonesia, the first letter of intent (LOI) for stand-by arrangement in October 1997, did not mention corporate debts, except for stating the amount of the national debts ($140 billion), and that the private sector debt was $80 billion, of which $35 billion was short-term.11 Only after the second LOI that IMF was agreeing to discuss problems of the private sector debt (late January 1998). After a very slow and confusing start, some agreement was reached in June 1998 (Frankfurt Agreement), and a framework was agreed upon in September 1998 (the Jakarta Initiative), close to a year after.

  • Corporate debt restructuring in Indonesia is proceeding very slowly, even though this is part of the lynchpin of the crisis. In June 1997 the Government of Indonesia (GOI) reached agreement with a group of private creditors on restructuring Indonesian debt (Frankfurt Agreement). It started with an agreement for Indonesian debtors to pay trade credit arrears and restructuring of some inter-bank debt. This is the result of a series of discussions between creditors and the Indonesian corporations, organized by GOI with the help of the Fund and WB. Indonesia also established the Indonesian Debt Restructuring Agency (INDRA). Since then, the GOI has developed a framework for corporate restructuring with the objective of helping viable, market oriented corporations which can generate sustainable growth. This framework is designed to encourage out-of-court, voluntary corporate restructuring.

  • The Jakarta Initiative that was announced in September 1998 is designed to facilitate and encourage voluntary corporate debt restructuring. Basically it provides a framework of out-of court negotiations, which applies to domestic and foreign creditors in a non-discriminatory manner. So far, 125 firms have entered negotiations under the Jakarta Initiative, covering $17.5 billion in foreign debt and 7.8 trillion rupiah in domestic debt. Out of these, agreements have been reached with 15 companies covering $2 billion in foreign debt and 600 billion rupiah in domestic rupiah debt.12


With respect to bank restructuring the following points deserved to be mentioned:

  • It has been rightly argued by many that bank restructuring is a process, not an event.13 For Indonesia during the crisis, since the first agreement with the IMF for a stand-by arrangement in October 1997 until the most recent one in March 16, 1999, there are 9 letters of intent signed by the government of Indonesia. In each LOI there are some part that itemize steps to be taken as an on-going process of bank restructuring.

  • Before April 1999 policy of bank restructuring and re-capitalization, several important steps in bank restructuring taken by the government include the followings:

    1. The controversial closure of 16 insolvent banks in November 1,1997

    2. The policy to providing guarantee to all depositors and creditors of all locally incorporated banks and the establishment of the Indonesia Bank Restructuring Agency (IBRA) in January 27, 1998

    3. The transfer to IBRA control, or nationalization of 7 large private banks accounting for over 75% of past Bank Indonesia liquidity support and 7 banks that have borrowed more than 500% of their capital, in April 22, 1998

    4. The closure of 6 insolvent banks and restructuring 6 banks that was taken over by IBRA previously, in August 21,1998

    5. The merger of 4 state banks (Exim, Bumi Daya, BDN and Bappindo) into Bank Mandiri in September 1998.

    6. And a number of steps taken aimed at strengthening banking infrastructures in areas, like a new bill to make Bank Indonesia an independent central bank, technical assistance for improvement of bank supervision, improvements of banking act, introduction of bankruptcy law and commercial court, etc.

  • The most recent steps in bank restructuring and re-capitalization involved different policies concerning 128 private banks that were given chances for restructuring after completing due diligence process. From 128 private banks with different categories, the followings decisions were made:

    1. 73 banks with CAR of 4 per cent or higher (class A banks) are allowed to operate normally without obligation for re-capitalization

    2. 9 banks with CAR between -25 to 4 per cent (class B banks) are allowed to operate with an obligation to re-capitalize aimed at a CAR of 4 per cent by April 21, 1999. To re-capitalize bank owners have to provide in cash, 20% of capital needed, while the rest will be borne by the Government using bonds.

    3. 9 class B banks are taken over by IBRA, and

    4. 38 banks of class C and class B banks were closed.

  • With the last steps of bank restructuring, Indonesia's banking industry comprises of 73 healthy, but small private banks, constituting less than 6 per cent of banking system liabilities, and large but unhealthy banks (state and nationalized banks), plus a number of joined venture banks. Joined venture banks are relatively small, even though their conditions are relatively all right. In terms of total assets and liabilities, seven state banks plus a number of nationalized banks, all with weak conditions, dominate the Indonesian banking industry. The non-performing loans are quite high, some estimate goes as high as 60-75%. The World Bank report said that nearly half of all Indonesian corporations are insolvent and having problem to meet their debt-service obligations to external and domestic creditors.

  • Restructuring of state owned banks and some nationalized banks that constitute the major part of Indonesian banking has not been in full speed. In other words the major part of Indonesia's banking industry has not been in a full process of being restructured. For example to re-capitalize the state banks plus regional banks and the nationalized banks (four from the previous decision and seven from the latest one) the Government will have to issue 300 trillion rupiahs (approximately $35 billion or 30% of GDP) worth of bonds. The budgetary cost for interest payments on these bonds will amount to about 3.5% of GDP.

  • Not much has been said about problems and prospects of other financial institutions, including finance companies, insurance, and others. The condition of finance companies in Indonesia, more than 250 in total are worse than banks. Fortunately in terms of the value of both their assets and liabilities has not been phenomenal such that the problem is not proportionally sizeable. However, in time it has to be addressed.


FINANCIAL INFRASTRUCTURE

  • The important parts of financial infrastructure are related to good governance in both the regulators as well as the private sector (bank owners and bank managers), transparency, and good legal culture.
    Indonesian banking problems are so complex, to a certain degree due to some curious misunderstanding about what bank ownership actually means. Due to rampant 'malpractice' of banking - like excessive group lending, frauds, lack of professionalism, etc. - people's perception about banking seems to be distorted. As if it becomes a conventional wisdom that owning a bank is identical with owning a private property. The fact that banking has the characteristics of a public good (service) is conveniently ignored. Part of the problem why bank ownership becomes a social issue, Pribumi vs. Chinese, and Indonesian vs. foreign ownership; is rooted in a wrong understanding of what it means by bank ownership. The absence of robust financial infrastructures; including strictly enforced prudential rules and regulations, well functioning banking supervision, disclosures, and good governance in public as well as private sector; in the past had contributed to the complexity of Indonesian banking problems.

  • Issues of independent central banking and financial supervision.

    1. Started with the second LOI the long-standing issue of the need for an independent central bank has been seriously addressed. President Habibie reiterated the government intention to give Bank Indonesia an independent status when he announced the new cabinet under his presidency in May 1998. The new law on central bank has been in operation. But, the Bank Bali scandal has certainly raised new concern about Bank Indonesia's independent.

    2. It is certainly an encouraging development to introduce an independent central bank in Indonesia. However Bank Indonesia still have to show that it deserves the new status by showing the professionalism of its staffs with unquestioned integrity from top to bottom.

    3. With respect to banking supervision, it has been my firm belief that in the current practice of finance with securitization and crossed ownership of financial institutions, it is important that supervision of bank and some other financial institutions, like multi finance, be put under one roof. Whether the supervisory authority with an enlarged function is under the central bank or becoming an independent institution is secondary. The most important is that it has to enjoy its independent status, free from government intervention.


FINAL NOTES

  1. Indonesian has been living beyond its means for quite sometime. This has been true for the national economy, whereby Indonesia has problems of financing national investment to saving gap. A sustainable development required prudent and responsible borrowing nationally. This has also been the case with respect to Indonesian corporations. For the commercial sectors, whether privately or state owned, whether in the real sector or financial sector highly leveraging has been the norm rather than exception. Most Indonesian corporations have high debt to equity ratio. Since the 90's this has been further complicated by heavy reliance on unhedged short-term external source of financing and reckless investments. Even without corruption and crony capitalism, these practices are not sustainable.

  2. Development represents a transformation of society from the one embedded with structural weaknesses to a new one adjusted to correct past mistakes and meet new challenges. The new paradigm of development should include;

    • The habit of thinking and acting based on 'exclusion' versus 'inclusion', 'partial and compartmentalization versus 'holistic'. The new Indonesia has to do away with 'tribal instinct' that treats others outside his/her own family/tribe as subhuman or non-human.14 What do these imply?

    • Transparency, openness and disclosures as part of the process of democracy. In non-transparent and weak governance in both government and private sector, it is hard to distinguish between the truth from the half-truth or a lie. Transparency is the answer. But, this has to be supplemented with an attitude for not taking things for granted nor believing things at face value.

Cambridge, MA, 16 Agustus 1999.


    @ Visiting Scholar, Harvard Institute for International Development (HIID), Cambridge, MA.
  1. See Paul Krugman, "Asia Recovering? It may be a false dawn" in Business Times (Singapore), August 26, 1999 and Wayne Arnold "Banking Scandals in Thailand and Indonesia Said Likely to Worsen", The New York Times, August 26, 1999.
  2. The World Bank produced a report Addressing the Social Impact of the Crisis in Indonesia: A Background Note for the 1998 CGI (mimeo), and a more general report Social Consequences of the East Asian Financial Crisis, (Washington, DC: The World Bank), September 1998.
  3. Taken from a column by Lim Say Boon, "The Art of the Possible", Far Eastern Economic Review, and February 4, 1999.
  4. This part is an update of a paper written before, "Monetary Policy and the Banking System in Indonesia: Some Lessons" as the Fifth India-ASEAN Eminent Persons Lecture, Research and Information System for Non-aligned and Other Developing puntries (RIS), New Delhi, 12 September 1998.
  5. The EFM was established in 1996, but it was improved in December 1997 and it was further improved to fasten the decision process as well as the drawing by the recipient when IMF dealt with Brazil's problem in January 1999. In the last mid-year Interim Committee Meeting of IMF in April 1999, a new facility, the Contingent Credit Line (CCL) was introduced to deal with potential currency problems of member countries. The last facility designed to help member countries early to avoid crisis to strike.
  6. In 1991 IMF published a study Banking Crisis : Cases and Issues, edited by V.Sundararajan and Thomas Balino. Then, only in 1996 and 1997 that some other studies were published, for examples Bank Soundness and Macroeconomic Policy, edited by Carl Johan Lindgren at al (IMF) and Bank Restructuring: Lessons from the 1980's edited by Andrew Sheng (WB), Systemic Bank Restructuring and Macroeconomic Policy edited by William E. Alexander et al, and Banking Soundness and Monetary Policy, edited by Charles Enoh and John Green (IMF).
  7. Again, many argued after observing the unfolding of the crisis that earlier warnings were made about the weakness of some fundamentals. But, there was practically no one made a specific argument that banking soundness should be treated as part and partial of macroeconomic fundamentals, until the crisis broke.
  8. Stijn Claessens, Systemic Bank and Corporate Restructuring: Experiences and Lessons for East Asia, World Bank: Washington DC, Background Papers, 1998 Annual Meetings of the IMF and the WB.
  9. This section is taken from an earlier paper Problems and Prospects of Bank Restructuring in Indonesia, a short note presented at a panel in a Seminar "Indonesia at the Crossroad" organized by Georgetown University, Washington DC, April 7, 1999.
  10. World Bank Brief on Corporate Restructuring in Indonesia, (mimeo)
  11. Contrary to what has been widely reported in the media, the first LOI to the Fund (October 31, 1997) was already reporting the total national debt of $140 billion, of which $33 billion was short-term, as well as an estimate of private sector debt around $80 billion. For sure, the data was not complete, since part of the private debts was only acquired directly from a number of big companies after my series of meetings with company owners to ask them to report their external exposures to Bank Indonesia. It is unfortunate that the first letter of intent has not been made public to clarify some public misunderstanding or misgiving.
  12. Indonesia: Supplementary Memorandum of Economic and Financial Policies, (Washington DC: IMF), March 16, 1999.
  13. For examples, Financial Reform: Theory and Experience, Gerard Capricio, et al, Eds. (New York: Cambridge University Press), 1994 and Bank Restructuring: Lessons from the 1980s,, Andrew Sheng, ed. (Washington DC: The World Bank), 1996
  14. Arif Budiman, Capitalism, Tribalism and Religion, a presentation at Harvard Asia Center, March 1999 (mimeo).


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