Preventing crisis

The Jakarta Post , Jakarta | Wed, 07/04/2007 10:44 AM | Opinion

It's been ten years since the financial crisis swept through the region, and no other country fell deeper and suffered longer than Indonesia. Now that Indonesia has seemingly emerged from the crisis, it's appropriate for us to look back and take lessons so that we can prevent similar crises from recurring in the future.

It is still fresh in our minds how our leaders responded to the crisis that began in Thailand on July 2, 1997, when the Thai central bank, with reserves going thin, floated its currency, the baht, which had remained pegged within a narrow trading band against the U.S. dollar.

Our then finance minister and also central bank governor were confident that the Thai ""flu"" would not spread to Indonesia because of its strong macroeconomic situation. But it turned out that the country was not immune at all, and within weeks the rupiah was under attack, and soon after, the central bank opened the floodgates and floated the rupiah.

The crisis then spread rapidly through the whole region, spanning from Indonesia to South Korea. But the worst affected countries were Thailand, Indonesia and South Korea, and of the three, many would agree, Indonesia was the most severely hit.

The International Monetary Fund (IMF) was called in with multi-billion dollar rescue packages to keep the economies afloat, or, more precisely, to help maintain their ability to repay their debts to creditors, mostly governments and investors in Western countries.

But the IMF packages, with their excessive policies, did not reduce the crisis but rather exacerbated it. Asset prices dropped, many companies went bankrupt under the weight of debt, and millions more fell into poverty as investors ran away with their investments. In Indonesia, the number of poor people jumped from 34 million in 1996 to almost 50 million in 1998.

But, to be fair to the IMF, this institution, with its perseverance, then helped Indonesia get out of the crisis. The gross domestic product has long surpassed its pre-crisis level, Indonesia's foreign exchange reserves have reached a new height of over US$50 billion now, and, most importantly, the number of poor people had dropped to 37 million as of last March.

On another positive note, we see that the crisis also brought many boons. Because of the crisis, we transformed ourselves from authoritarian ruled to a democracy, from a centralistic way of governing to decentralization and from military to largely-civilian-dominated governments.

On the economic front, we have been able to dismantle a number of monopolies run by both the state and private sectors, like the clove monopoly, or the unrealistic national car project, liberalizing international trade and investment.

We now have an independent central bank, which is responsible for maintaining monetary policy, especially keeping inflation in check. This central bank's independence, which has gone through a number of tests over time, has given added confidence to investors and people in general in the management of the country's macroeconomic policies.

However, we still have one unfinished reform item, the establishment of an independent authority to oversee our remaining flimsy banking sector. Apparently, the central bank, which currently oversees banks, has an interest in not seeing the establishment of this banking authority. Therefore, we call on political leaders in this country to speed up its establishment.

Making our banking system strong is in the interests of all of us. It was precisely because of our weak banking sector that the crisis was deeper and longer here. Now we are still concerned with the overall state of our banks, whose intermediation functions have not fully returned.

Despite our seeming recovery from the crisis, it is important we are not overconfident that such a crisis can never happen again. Looking at ourselves, we are far from strong. Our banking system is still weak.

To strengthen our defenses against possible future crises, we should continue to cooperate with other countries in the region to face the growing global financial imbalance. The idea of establishing an Asian version of the IMF, the Asian Monetary Fund, is an interesting proposition. And Indonesia should not be left out.

Most of all, we have to be strong domestically. We have got strong capital from the crisis, but we need to strengthen everything, be it the democracy, decentralization or the independence of the central bank, so that we can not only prevent the crisis from recurring but also create more wealth and take more people out of poverty.

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