The World Is Indonesia Now

The Jakarta Globe, November 22, 2008

Berly Martawardaya

Paul Krugman, a New York Times op-ed columnist and economics professor who has done seminal work on international trade and financial crises, suggested the title of this article in his blog shortly after he was announced as the winner of the 2008 Nobel Prize for Economics. The line is an echo of a famous editorial by Le Monde, a major French newspaper, one day after the Al Qaeda attack on the World Trade Center: “We are all American now.” Now the world financial system is under attack and a come-together moment exists again. Let’s put this chance to good use and share our experiences with the world.

Transparency and regulation matter. Indonesia’s banking sector in the late ’90s was littered with private banks breaking legal lending limits and public banks acting like bottomless pockets for politically favored entities. Wall Street has its own set of bad practices. Former Fed chief Alan Greenspan admitted to mistakes during his tenure, when in his overzealous belief in market righteousness, he rejected disclosure and regulatory frameworks for exotic financial instruments.

The result has been a disaster. When people are not sure of the value of what banks own, which banks have it and how much they paid for it, panic selling or bank runs can ensue.

The currency speculator vultures are watching government policy closely after massive capital outflow from foreign investors. Having little more than $50 billion in reserve is not an impenetrable wall for the rupiah when any sign of weakness could be used to start a currency attack. Recent uncertainty about Indover and Bakrie stocks was not an image that projected consistency and objectivity. And what about our end-of-year payment-in-dollar obligations?

Diversify, diversify. Exports are likely to drop by 10 percent to 30 percent, especially in the United States and Europe. To escape the worst secondary impact, Indonesia needs to drive domestic consumption, attract foreign investment or look for other export markets. The momentum is ripe to get rid of corruption and improve Indonesia’s investment climate.

Treat the stock market like a lady. Currently, the lady is fearful and frightened. She needs repeated assurance, commitment and support to get her back on her feet. But this time there will not be an IMF knight in shining armor to save the day, albeit temporarily. Unlike the banking and financial sector in the United States, the counterpart in Indonesia has very little direct exposure to subprime mortgages. Just make sure the government is not throwing too much expensive jewelry at the lady to calm her.

No Indonesian Bank Restructuring Agency, please. Henry Paulson, the US Treasury secretary, was apparently closely studying the agency, with many of its former leaders under criminal investigation. In his original three-page proposal, he demanded immunity from review “by any court of law or any administrative agency” on how he would spend a $700 billion bailout. Wisely, the US Congress rejected his demand. The more accountable option for the United States, and for us, would be a British-style injection of government capital for stock ownership instead of (bad) debt ownership, and let the banks settle themselves.

Keynes yes, IMF no. Very few self-respecting economists, and none who practice in developed countries, would insist on cutting government social expenditure. Instead of a burden, this is a tool to increase the circulation of money and a worthy investment in future human capital. The Keynesian remedy of escaping a liquidity trap through government deficit financing is more relevant than ever these days.

Not often does Indonesia have important lessons to teach the rest of the world. Let’s hope global policy makers are paying attention and are learning from us, as Paul Krugman has suggested.

Berly Martawardaya is a lecturer in economics at the University of Indonesia and writes a regular blog for Kafe Depok.