The recent monetary history of Indonesia is full of interesting cases of the way in which monetary policy is practised in a developing country. This short note is neither an account of that history nor a chronicle of such cases. My purpose is much more modest, namely, to sketch what I consider to be the major complications associated with the practical conduct of monetary policy in Indonesia at present. The views expressed here are entirely subjective; they constitute my own impression and perspective on the issues, drawing on my varying degrees of involvement in monetary policy formulation and implementation in Indonesia in the past decade or so, but particularly in the past eighteen months since my assignment to Bank Indonesia.

Information gap

Let me start by stating that in Indonesia (but I suspect also in many other developing countries) much of the daily conduct of monetary policy is only a little more than improvised actions (or non-actions) by the monetary authorities, taking their decisions on the basis of incomplete information in order to carry the economy through to another day. While this is an obvious exaggeration, I believe it contains some grains of truth. The problem of lack of information in practical policy making is real and ongoing. The uncertainty as to whether the right decisions have been made always haunts policy makers. And clearly, the wider the information gap, the more intense are such feelings. Pressed by time, and by the rapidity of the flow of events, policy-makers almost always have to make some leap of faith in reaching their decisions, and once the decisions are made they still need to keep their fingers crossed. It is for this reason that since being assigned to the Bank I have given upgrading the quality of information flows into various policy fora a very high priority.

Over the medium term, we would like to think that we are on firmer ground. There is more time to think through the problems, and more opportunity to gather information; consequently there is less need to improvise.

The simulation model of global clothing trade presented in this chapter evaluates the effects of trade distortions on world trade in clothing, with special reference to the effect on Thailand. Like the model presented in Chapter 6, this mode is global in nature and hence captures terms of trade effects. It also incorporates differentiated products by country of origin. The differentiated product models have been widely applied to community trade, particularly to agricultural products. Honma and Heady (1984) examined the trade flows of the international wheat trade, and Pearson and Babula (1988) applied the same type of model to the effects of Japanese monetary policy on U.S. agricultural exports.

Model Relating to Clothing and Textiles

Several models have dealt with clothing and textiles. Wallace, Naylor and Sasser (1971) presented an econometric model of the textile industry in the United States in an attempt to explain the behaviour of U.S. producers. Hamilton (1981) developed a model to analyse the effects of import quota restrictions on the Swedish textile industry. Cline (1987) constructed a model of clothing and textiles for the United States to explain why imports into the United States increased sharply in the early 1980s. He concluded that the major reason were overvalued exchange rates. All of these earlier models were partial equilibrium models of the homogeneous product type rather than global in nature, and hence they were unable to deal with the implications of the arrangements for world prices. Partial models tend to emphasize the rise in domestic prices brought about by restrictive arrangements. These provide gains to developing countries. But the models cannot capture price depressing terms of trade effects in other markets.

The most recent model for clothing and textiles was constructed by Trela and Whalley (1988). They applied a CGE structure to global trade in clothing and textiles to evaluate the welfare effects of the MFA on exporting countries.

Introduction

The virtual explosion of Indonesia's financial industry since the October 1988 deregulation package (‘Pakto’) has presented a new set of problems to government regulators, who must now manage a highly competitive market without undermining the gains in economic efficiency engendered by market reforms. Perhaps the greatest fear of bank regulators is the simple market dictum that unprofitable firms must fail, because failure of a bank is often viewed as a possible trigger for general bank runs and financial panics. Among other suggestions, government-sponsored deposit insurance schemes are proffered as a preventative measure. As Indonesian regulators have moved towards a more conservative regulatory stance since 1991, a deposit insurance scheme is no doubt a tempting response to the concern that some banks may face insolvency at some tune in the future.

The collapse of Bank Summa (Maclntyre and Sjahrir 1993:12-16) and revocation of its licence by the Finance Minister in December 1992 fuelled a lively public debate on the merits of deposit insurance. However, the Bank Summa crisis also showed that the liquidation of a major private bank need not result in a widespread bank panic, nor in large losses to small savers. Nevertheless, the message to other private banks and to depositors was clear. Owners would not be shielded from the consequences of losses suffered by their banks, and depositors could expect to recover their funds only to the extent that banks’ remaining assets and collateral against bad loans were adequate for the purpose. This message in turn creates a powerful disincentive for private banks to engage in unsound practices, especially to the extent that depositors can monitor them and demand higher compensation or withdraw funds in response to increased risk.

Deposit insurance, by contrast, entails an explicit government guarantee to depositors—and often an implicit guarantee to bank owners—that they will not bear the burden of bank losses, nor, in the case of depositors, earn higher returns for entrusting their savings to riskier banks.

From 1987 through 1993, the number of listed companies and market capitalisation on the Jakarta Stock Exchange (JSX) rose from 24 to 174 issuers and from $68 million to $33 billion. Indonesian securities regulation developed in parallel with this growth during the capital market's infancy, but now faces adolescence. This paper seeks to clarify problems of market development, given the sometimes conflicting policies embedded in existing regulations.

Indonesian capital market and privatisation policies followed different paths until relatively recently. However, the pending equity offering of the state-owned telecommunications enterprise PT Indosat (Linnan 1994), to be listed on the JSX and New York Stock Exchange (NYSE), has produced a circumstance in which domestic regulation is being subjected to comparison with foreign practice. Dual listing privatisation plans and concurrent offerings abroad by private issuers have the unintended consequence of focusing attention on the question whether, by raising the cost of capital, existing non- market based Indonesian regulation pushes established issuers into foreign capital markets, while disadvantaging smaller issuers and affecting domestic market development adversely. Arguably, globalisation in the form of competition between capital market regulatory structures in Indonesia and elsewhere will improve Indonesian practices in the near to medium term.

Issues for Capital Market Development and Privatisation

Regulatory development in the capital market is complicated by the idea that, alongside ‘best practice’ issues, securities regulation also may be shaped by broader policy considerations. In the Indonesian context, these include the sometimes inconsistent concerns of equity, economic efficiency, economic concentration, and nationalism. This paper takes the position that the result thus far has been potentially to limit development of the capital market.

What is meant by the distinction between ‘market based’ and ‘non-market based’ capital market regulation? For present purposes, ‘market based’ regulation is defined as disclosure-oriented regulation, which assumes that the objective is to support the market's function by establishing a neutral framework for the informed conduct of private parties’ economic relations, while recognising that emerging securities markets are often neither efficient nor liquid.

Until recently, any assessment of the sustainability of East Asian growth would have been made with a strong qualification about its vulnerability to weakness in the international trading system. However, this may not necessarily be the case — that is, so long as East Asian states build constructively on the model of trade policy and expansion that has emerged since the mid-1980s. Over this time, The large majority of East Asian export growth has been to markets in East Asia itself. This is an important reason why strong growth was sustained in East Asian developing countries through the recession in the industrial countries.

It goes without saying that the opportunities for East Asian growth are greater if the markets of Europe and North America are expanding, and remaining open to increased volumes of intercontinental trade. But these influences on East Asian growth are becoming steadily less critical, as the scale of East Asian production and trade expands. It is now open to East Asia to consider continued commitment to multilateral open trade as the basis of a high growth strategy, even if the United States is unsympathetic to open trade, and remains aloof. This is a new element in Asia-Pacific economic relations, to which the political economy of trade policy will take some time to adjust on both sides of the Pacific.

The East Asian economies have in fact, and contrary to popular perception in the United States and Europe, undertaken more trade and economic liberalization in the last two decades than any other group of countries.

The reality of East Asian and Asia-Pacific regional trade expansion is very different from that which is emerging in North America and which is established and continuing to develop in Europe.

There has been no economically important trade-expanding discrimination in East Asia. Trade preferences within the Association of Southeast Asian Nations (ASEAN) region so far have had trivial effects, although the 1991 commitment by Heads of Government to move towards an ASEAN Free Trade Area (AFTA) will have future significance.

1 Economic reforms and the social aspects of development

The impact of Vietnam's economic reforms on the social aspects of development is less straightforward than on the economic aspects. Though the market economy is still in the process of evolving, both positive and negative aspects of the reforms on social development have begun to reveal themselves.

First and foremost, the social structure in terms of the trades, professions, and incomes has certainly undergone a drastic change along with the economic restructuring. The market economy has brought about a change in requirements for personnel in the trades and professions and calls for a large labour force. In both urban and rural areas, the system of social values hitherto used in evaluating the social positions of the trades and professions as well as of individuals in society has changed. Businessmen, traders, persons engaged in the service sector, who were formerly not held in esteem by society, are now increasing in numbers.

Small and medium-sized private businesses have received a stimulus from the state and they now draw in young people who previously would have preferred to work in the state-managed economic sector or state-run offices.

The ever more accentuated differentiation in incomes between one group of persons and another has on the one hand made for more buoyant business activities, but on the other has weakened the formerly close-knit communal relations, particularly those of rural communities. Peasant households are now playing a more active role while economic community organizations such as agricultural co-operatives and small industrial and handicraft organizations see their role and position being whittled away. In former times, economic community organizations also assumed social welfare functions such as providing health care service at the grassroots level for the welfare of workers and their families, education and care for children at crèche and kindergarten age, insurance for labourers and elderly people, as well as cultural and spiritual activities for the benefit of those living near where the organizations were set up. After the economic restructuring, economic as well as social aspects of welfare provided by such organizations gradually diminished.

Senior Officials' Meetings — SOMs in the language of APEC — were and are the engine of APEC. It is at these meetings that operational decisions are made that provide momentum for the organization; it is here that Senior Officials make policy recommendations to their Ministers. The five SOMs leading up to the Seattle Ministerial Meeting were defining moments for the Secretariat. In speeches, I often described the Senior Officials as my Board of Directors, and it was at the SOMs that we received feedback on our current performance as well as instructions for the Secretariat's future course. The first SOM at Washington in December 1992 provided our original charter, but the second SOM, in February 1993, was our proving ground.

The First Senior Officials' Meeting,

Washington, D.C., 2–4 December 1992

The first SOM took place at the Department of State before I left for Singapore. Its main tasks were to approve the proposed arrangements for setting up the Secretariat and the operational and administrative budgets (about US$1 million each), and to agree to a budget cycle. The SOM approved the proposed organization plan with little debate; it was evident that the Senior Officials were pleased that the United States had assigned a senior diplomat to the Executive Director position. This set a pattern and my successors also held the title of Ambassador when they took over. In Asia, where protocol and rank are especially important, these designations helped give the new organization credibility.

There were some pleasant surprises. When I met the co-leader of the Japanese delegation, Ambassador Nobutoshi Akao, at the U.S.–Japan bilateral session, we both had the feeling that we had met before. We finally remembered that we had been on a raft together as part of a crew of diplomats and business people on a 1989 Whitewater rafting trip down the Salmon River in Idaho.