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AN ASSESSMENT OF THE ASSET MANAGEMENT

COMPANY MODEL IN THE REFORM OF

INDONESIA'S BANKING SECTOR

Jake Redway

To cite this article: Jake Redway (2002) AN ASSESSMENT OF THE ASSET MANAGEMENT

COMPANY MODEL IN THE REFORM OF INDONESIA'S BANKING SECTOR, Bulletin of Indonesian Economic Studies, 38:2, 241-250, DOI: 10.1080/000749102320145075

To link to this article: http://dx.doi.org/10.1080/000749102320145075

Published online: 17 Jun 2010.

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BulletinofIndonesianEconomicStudies,Vol.38,No.2,2002:241–50

As Indonesiacomes to terms with its thirdgovernmentinfouryears,itmaybe timelytoreassesstheutilityoftheasset managementcompanymodelasthebasis forIndonesia’seffortstorehabilitateand reformitsbankingsector.Inparticular,it isworthconsideringwhetherthefailure ofsuccessivegovernmentstopursuethe remediesprescribedbytheinternational communityforIndonesia’sbankingsec -torrepresentssolelytheobstinacyofcor -rupt and misguided politicians, or is evidence thattheremediesmaynotbe workableintheIndonesianpoliticalcon -text. Theformercharacterisation is fre -quently repeated in the international financial press and is freighted with moraljudgments.Thelatter,whilereflect -ingalesssatisfyingmoraloutcome,may bethemorerealisticview.

Muchhasbeenwrittenaboutthemacro -economicassumptionsbehindthewell

-intentioned programs promotedby the InternationalMonetaryFund(IMF).Most oftheliteratureiscritical. Indeed,ithas becomefashionabletoblametheIMFfor exacerbating thefinancialcrisis,byfail -ingtoanalysethenatureoftheeconomic problem properly or to appreciate ad -equately the weaknesses specific to Indonesia’sbankingsector.Criticismhas alsobeenlevelledatthelengthylistofre -form initiatives included in the IMF’s many Lettersof IntentwithIndonesia. Littlehasbeensaid,however,aboutthe commercialandpoliticalramificationsof thenewinstitutionsandmechanismsput inplacebytheIndonesiangovernmentto implementthereformsrecommendedby theIMF,theWorldBankandotheradvi -sors.Iftheoriginalmacroeconomicanaly -siswasnotcorrectandthereformagenda tooambitious,itmaybethatotheranaly -seswerealsofaultyandhadunintended

AN

ASSESSMENT

OF

THE

ASSET

MANAGEMENT

COMPANY

MODEL

IN

THE

REFORM

OF

INDONESIA’S

BANKING

SECTOR

JakeRedway*

Latham&Watkins,Singapore

Lackofsatisfactory progresswithreformofthebankingsectormayimplythatthe

chosenremedies wereunworkable in theIndonesian context. Theseremedies,

suggested bythe internationalcommunity,appear notto havetakenproper ac

-countofthe commercialand politicalramificationsof the newinstitutionsand

mechanismsthatweretobeputinplace.Ofkeyimportanceisthepracticaldiffi

-cultyoffindingsuitablebuyersforbanksandassetstakenoverbythenewbank

restructuring agency.Almosttheentirecorporatesectorwasindistressasaresult

ofthe crisis,whileforeignbuyers werereluctanttocommitthemselvesgivenan

inadequatelegalsystemaswellassignificant nationalistic oppositiontothesaleof

corporateassetstoforeignentities.Thisarticlediscussesreasonsforthefailureto

achieveseveralprincipalobjectivesofthereforms,andcanvassesalternative ap

-proachesthatmightbemoresuccessful.

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consequences. Indeed,themediumand longer-termimplicationsforthepolitical economyofIndonesiaoftheseinstitutions and mechanisms may prove to be of greatersignificancetoIndonesia’swell -beingthanthelingeringafter-effectsofany near-termeconomicprescriptions.

THESTRUCTURESFORREFORM

The mechanisms and institutions for implementing Indonesia’sfinancialsec -tor reform were conceptually quite straightforward.

First,anewgovernmentagencywould be established with responsibility for overseeing and implementing the re -forms—theIndonesianBankRestructur -ingAgency(IBRA)(Johnson1998:47–9). IBRAisonlyoneofseveralAsianasset managementcompaniesestablished in the mould of the original Resolution TrustCompany(RTC)formedintheUS to address the American savings and loancrisisofthe1980s.

Non-performingloanswouldbetrans -ferredfromIndonesia’sfailedorfailing financial institutions to IBRA, which wouldpackageandresellthematadis -countinthemarket.Theassetsoffailed financialinstitutionswouldbedisposed ofatvalue,intransparentmarkettrans -actions.Thebalancesheetsoffailingfi -nancialinstitutionswouldberelievedof badassetstofacilitatetheirrehabilitation. Thegovernmentwouldapplythepro -ceedstoreducethecoststothenational budget.

Indealing with owners of financial institutions foundtohavetransgressed regulatoryrequirementsorotherwiseto have behaved inappropriately in the managementoftheirinstitutions, again precedentsfromtheAmericansavings andloancrisis wereavailable.Owners wouldbeprosecutedvigorouslyandtheir assetsseizedtosatisfytheunperformed obligations oftheirrespectivefinancial institutions.

Since IBRA did not yet exist, deci -sionswouldhavetobemadeaboutthe ministryoragenciesoftheIndonesian governmenttowhich IBRAwouldbe subordinate. Likewise, staff would need to be hired so that IBRA could carryoutitsfunctions.

DISTINGUISHING

THEPRECEDENTS

Precedentsarevaluable.Theyembody thecollectivewisdomaccumulatedwith respecttospecificsubjectmatter.They must,however,beusedwithcare.Doing whathasbeendonebeforecanbecoun -terproductive, if circumstances differ markedly.Alistfollowsofsomesignifi -cantpointsofdifferencebetweenthesitu -ationfacedbythosetryingtoaddressthe savings and loan crisis inthe US and thosetryingtoaddressthebankingcri -sisinIndonesia.

The savings and loan crisis of the 1980swasan isolated phenomenonin anotherwisehealthyeconomy.Theex -istenceoffinancialinstitutions outside the savings and loan sector was not threatened, andtheAmericaneconomy asawholewassound.InIndonesia,the entireeconomywasinastateofcollapse analogoustothatoftheGreatDepres -sionof the1930s. The financial sector had imploded. Had the savings and loancrisisoccurredattheheightofthe Great D epression, would President Roosevelthavesuggestedtheestablish -mentoftheRTC?

Theestablishment ofanRTC-likeen -tity,thetransfertothatentityofnon-per -fo rm ing lo ans and their r esale in securitised bundles through auctions assumesa broad, solvent pool ofpur -chasers and a legal environmentthat permitspurchaserstovalueandenforce theirrightsinrespectoftheassetsthey acquire.IfIndonesiancreditorscannot collectfromIndonesianborrowers,how realisticisitforforeigninvestorstoex

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TheReformofIndonesia’sBankingSector 243

pectthattheywillhavegreatersuccess incollectingthevalueoftheassetsthey purchase?

The savingsandloanindustryinthe USwasprincipallyamortgageorreales -tate-basedfinancialindustry.Americais possessedofdeepreservesoffinancial, accountingandlegalspecialists, aswell asnumerouslargeinstitutionsspecialis -inginthemanagementofrealestateas -sets. Such assetsare relatively easy to manage.Aplaninwhichlargepoolsof realestateassetswereseized,managed byneutralpartiesonaninterimbasisand thensoldtoasolventpoolofbuyerswas feasibleinthesavingsandloancrisisin America.Incontrast,assetsseizedinIn -donesiacomefromallindustrialsectors. Manufacturingfirmsproducingautomo -biles,tyres,petrochemicalsandfoodprod -ucts,nottomentionagrarianenterprises suchaspalmoilplantationsandshrimp farms,requirespecialisedmanagementex -pertisetorunthemaswellastheabilityto deal with significant labour problems. Whenentireregionsdependuponthese industriesfortaxrevenuesandemploy -ment,theprocessinevitablybecomespo -litical.Ifoneexcludesthecurrentowners andtheirmanagementteams(withallthe deficiencies theymayhave),specialised managementskillsofthetyperequiredare limitedinIndonesia.

Indonesia is a post-colonial society withlatent,albeitmild,nationalisticten -dencies.BuyersofIndonesianassetscan onlybe(1)foreignersor(2)Indonesians with substantial economic resources— who,ingeneral,aretheverysamepeople beingcompelledtodisposeoftheiras -sets. Whileforeign advisors mayhave greatconfidenceintheabilityofforeign strategicinvestorstoimprovethetrans -parencyandoperational characteristics of Indonesianmanagement, post-colo -nialIndonesiansmayunderstandablybe circumspect aboutseeingentiresectors oftheirindustrypassintothecontrolof

foreign companies,particularly at dis -tressedmarketprices.Itisunlikelythat anyOECDnationwouldeveracceptthe degreeofforeignpenetrationthatwould resultfromthecontemplated saleofas -sets demandedby foreign advisors of Indonesia’sgovernment.

America is a legalistic (somewould say hyper-legalistic) society with a strongtraditionoflawandorderanda puritanheritage.Depositsplacedatsav -ings and loan institutions enjoyed the express guarantee of the government. Ownerswho abused their institutions clearlytransgressed acceptablenorms, bothlegalandcultural,fortheUS.With -outapologisingforthemisbehaviour of Indonesianbankowners,pointsofdif -ferencedoneedtobenoted.Therewas noexpressgovernmentguaranteeforIn -donesianbankdepositsatthetimeofthe financialcrisis.Thereisnoquestionthat Indonesianbankownersusedthedepos -itstomakeloanstotheirowncompanies in excess of legal, and healthy, limits. That said, theobservation of one dis -gracedIndonesianbankownerisillus -trativeofa wayofthinkingnottotally devoidoflogic.‘Whoelsewerewegoing tolendto?Inacountrylikeours,without enforceablelaws,theonlypeopleyoucan besurewillpayyoubackareyourown companies.’

EVALUATINGTHE

REFORMINITIATIVE

Fewarepreparedtodeclarethereform initiativetodateasuccess.Fromtheper -spectiveoftheforeignadvisor, thereis littletogiveasenseofaccomplishment.

Theprivatisation ofstateenterprises was declared a principal objective of Indonesia’s financialand economicre -forms.Althoughafewexamplesmaybe cited to the contrary, theprivatisation initiativehasfailedtotakeoff.Inreality, Indonesiahaseffectively imposedstate oversight and control on thefinancial

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planning of a substantial portion of Indonesia’sprivatelyowned industrial assetsbyplacingthemunderthecontrol ofIBRA.1_The_recent_announcement_that

Indonesia’sMinisterofStateEnterprises willnowhavesupervisory responsibil -ityforIBRAsignalsthedefeatofthisIMF objective.InsteadofsolvingIndonesia’s financialsectorcrisis,arguably aprob -lemhasbeencreatedintherealsectorof theeconomy.2

Implementation of the rule of law wasdeclaredaprincipalobjectiveofthe reforminitiative. Asinotherpartsof the world, multilateral organisations initially pressed for statutory reform when the statutes in place were in factadequate,andenforcementwasthe realissue.Sadly,althoughtheneedfor enforcementhasfinallybeenrecognised, attentionnowfocusesonlyuponenforce -ment.Nocommentismadeabout‘equal protection’ underthelaw.Giventhein -effectivenessofIndonesia’sjudiciary,for -eignpressurehasmountedforasingle convictiontodemonstrate thatithasthe powertodeliverjustice.The resulthas beenvigilantejustice,withthepolitical processseeingthemanoevringofpoten -tialdefendantstopositionothersasthe ‘scapegoat’.Morecynicalobserversnote theopportunityfortheofficeoftheattor -ney general to profit personally from these ‘investigations’. Reformers, both Indonesian and foreign, seem totally unconcerned about the arbitrary and politicalmannerinwhich‘justice’isbe -ing pursued in Indonesia. This will probably prove to be a mistake. The politicisationofjudiciary proceedings andvigilantejusticecanbeasdebilitat -ingasnon-enforcement.

Reductionofcorruption(KKN)was declaredaprincipalobjectiveofthere -formprocess.Thelimiting,ifnoteradi -cation, of KKN was sought through ‘transparentauctions’and theousting of Indonesia’s current economic elite.

Auctions,transparent orotherwise,can occuronlywhenthereisapoolofsol -ventbuyers. Indonesia’spost-colonial sensitivity makesitdifficultforagov -ernment trying to establish lasting politicalfoundations toseeforeignpur -chasers as the principal prospective buyers. The government understand -ablyfindsitevenmoredifficulttosell the country’s industrial assets at dis -tressed prices. The apparent need of Indonesia’s domestic political reform movementto‘demonise’theSoeharto croniesmakesitdifficultformembersof theIndonesianelite,totheextentthat theycontinuetocontrolsubstantialfi -nancialresources,tobetheprospective purchasers. Indeed,the‘politicsofscan -dal’ impedes sales to any Indonesian purchaser,sinceallareuniformlysus -pectedof(andindeedmaybe)fronting forformerowners.Ratherthan‘trans -parentauctions’,therearenosales.

Inaperverseway,IBRAmayhavebe -comeamagnetforcorruption. Substan -tialproductiveIndonesianassetshave beencentralised underthecontrolofa singlegovernmentagency.Thatagency, below its top management level, is staffedbymanyformerbankemployees. Notsurprisingly, therelativelyshallow pool ofIndonesian nationals with the technicalexpertiseto dealwithfinan -cialassets is sourced mostly fromthe very banks that had accumulated the problem loans. As these banks were closedor downsized,laid-offworkers naturally found their future employ -mentinthesingle largestfinancialin -stitutionhiringemployees,IBRA.Since theagencylackstheoperationalexper -tisetomanagetheassetsunderitscon -trol, itmustcontinuetorelyuponthe formerowners,andmanagementloyal totheformerowners,tohandleday-to -day operations. The IBRA employees responsiblefortheassetsquitenaturally havealso becomea conduitfor infor

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mallyresolvingproblems.Theresultis stagnationastheformerownersandthe government struggle for control over IBRAandtheassets—bothfinancialand real—thatitcontrols.

Lastly,thecurrentcourseofconduct may inadvertently be encouraging a continuationofold‘badpractices’rather than the institution of internationally recognised ‘best practice’. The institu -tionallegacyoftheSoehartoeraisacon -stitutionalframeworkintendedtoprovide thecontextforastrongpresidentialoffice andarelatively weaklegislatureinhab -ited by numerousfragmented political partiesbasedmoreonpersonalthanphilo -sophicalties.WithSoehartogone,thein -formal patrimonial support for the presidencyhasalsogone,orperhapsitis bettertosaythatitissubjecttorenegotia -tion.Asthepost-Soehartopoliticalorder triestofinditsfeet,opportunitiesforthe tradingoffinancialandpoliticalfavours abound.Ifthepoliticalstructuresarenot abletoaccommodatedebateandresolu -tionoftheissuesinaforthrightmanner, perhapstheycanberesolvedbehindthe scenes.There isgood,ifcircumstantial, evidencetoindicatethattheSalimGroup andIBRAhavelargelycompletedthere -purchase,atasubstantialdiscount,ofthe coregroupassetsadministeredbyIBRA, bypartiesfriendlytotheSalimGroup.As thecollection ofdebtsfrom Indonesia’s financial andpoliticalelite becomesin -creasinglypoliticised,membersoftheelite understand thattheirassets are worth morewhenhiddenandusedasbargain -ingchips.

WHATWENTWRONG?

Well-intentionedreformers,bothforeign andIndonesian, havefailedtoconsider adequatelythepoliticalcontextoffinan -cial sectorreform.Severalfactorshave beenatwork.

First,tosomeextent,thisfailuremay haveresultedfromthecompartmentali

-sationofmodernsociety.Thediscipline which,attheendofthe19thcentury,was referredtoas‘politicaleconomy’hasnow becometwodisciplines,politicalscience andeconomics(thelattersometimesre -ferredtoasthe‘dismal’science).Thecol -lapseoftheIndonesianfinancialsector wasseenprimarilyasaneconomic,not apolitical,problem.

Second,themultilateralinstitutions that generally addressfinancialcrises arenotassensitivetohostcountrypo -liticalissuesastheyperhapsshouldbe. Theydonothavethestafftoplayapo -liticalroleinthelocaleconomy,evenif itweredesirablethattheyperformthis intrusiveroleatall.Notlong ago,the IMFand itsstaffofeconomistswould discusseconomicissueswiththeMin -isterofFinanceortheheadofthecen -tr al bank in the hos t c o untr y. In Indonesia,IMFrepresentatives cannow beseenspeakingtotheheadsofpoliti -cal parties and to members of parlia -ment.Thisintrusivenessintoday-to-day politicallife is new.Itisnotclearthat the multilateral institutions are pre -pared to perform this function, or whetheritisanappropriate functionfor themtoperformatall.

Third,fromanIndonesianperspective, reformersmayhavebeenoverwhelmed bythenewnessoftheexperienceofcri -sis.The Indonesianfinancialcrisiswas ofanorderofmagnitudecomparableto thatoftheGreatDepression.Nobodyin contemporary Indonesia had had any experienceindealingwithaproblemof such dimensions. Giventhe opacity of governanceinIndonesiainthelaterSoe -hartoyears,itmayhavetakensometime forinstitutionstoformwhichcouldad -dressit.Suchinstitutions, iftheycould beformedatall,wouldneedtimetoob -tainandorganisetheinformationneces -sarytodealwiththeproblemsthatarose. Timewasinshortsupplyattheonsetof thecrisis.

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Ironically, Indonesia, among the Asian nations, may have been pecu -liarlyvulnerable. Ithasahistoryofbe -ing receptive to advice from foreign sources.The‘BerkeleyMafia’—agroup ofIndonesianeconomiststrainedatthe UniversityofCalifornia,Berkeley,inthe late1950swhowentontodominateeco -nomic policy makingduring theSoe -hartoera(Arndt1997:41–2)—reflected atransplantingofforeignadviceintothe Indonesian system. Notwithstanding nationalistic andemergingmarketpro -tectionistconcerns,whichareuniversal and understandable, Indonesia has generallybeenreceptivetosuggestions for financial liberalisation and eco -nomicdevelopment.Itsnationalism has largelybeenlatent.Giventhe‘newness’ ofthefinancialcrisisandthelackofex -perienceindealingwithsuchproblems, Indonesians naturallylookedtoforeign advisors ashaving greaterexperience than themselves, assuming that they wouldknowwhattodo.Onlygradu -ally has it dawned on Indonesian re -formersthatthefinancialreformersfrom abroad may not have understood the situationproperly.

Severalotherspecificfactorsmaynot adequatelyhavebeentakenintoaccount.

TheLegacyofKKN

TheSoehartoregimewasinplaceforso longthatthereisnooneoldenoughor experienced enoughtomanageamajor industrialenterpriseorgovernmentpro -gramwhodidnothavetoaccommodate himselfor herself totheways of New Ordersociety.Inshort,anyonewhomight bequalifiedtoplayanimportantrolein anyreformefforthasa‘record’.Notun -likethesituationthatexistedattheend oftheSovietera,orindeedinJapanand GermanyafterWorldWarII,thereisa need to accommodate past practices whenformingthepoliticalbasisforany reforminitiatives.

AWeakGovernment

Areforminitiativeofthescopecontem -platedbytheIMFLettersofIntentwas ‘revolutionary’,requiringastronggov -ernmentifitwastohaveanychanceof beingimplemented.Anewgovernment comingto powerinuncertain timesis rarelyastronggovernment,atleastinits earlyyears.Ifoneviewstheoverthrowof Soehartoasa‘revolutionaryevent’,the neworderdisplacingtheold‘NewOr -der’hasyettoidentifyitself.Rather,poli -ticiansinaweakgovernmentarelooking forsupportsimplytostayingovernment. Reformers,bothIndonesianandforeign, may need to make allowance in their plansformoretimeandmoreroomfor compromise. Thealternative modelisa governmentofLeninistdiscipline and determination. History provides little support for the proposition that such governments acceleratereformoverthe longerterm.

Nationalism

Indonesia is a post-colonial society. Havingreclaimeditsindependenceand regainedcontroloveritsproductiveeco -nomicresources,itisunlikelythatare -form program calling for the sale of substantialeconomicassetstoforeign -ers at distressed prices would enjoy much political support. Even if such sales could be effected, a destructive backlashmightsubsequentlyoccur.In -deed,itseemslikelythat,asIndonesia recovered its economichealth, efforts would bemadetoregaincontrol over suchassets.

AnEconomicElite

Indonesiais a poor country. The edu -catedelitethatcontrolsitseconomicas -sets, and that has the educational and technicalcapabilitiestomanagethem,is relativelysmall.Oncethepreviouslyrul -ingeconomiceliteisexcludedfrompar -ticipatinginIndonesia’seconomicfuture,

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thisleavesfewpeoplequalifiedtoper -formtherole.Whenreformerssoughtto displacethecurrentowners,itwasnot clear who would replace them—other than foreign managers,who wouldbe unlikelytobeacceptable.

WHATISTOBEDONE?

Prioritieshavetobeclarified.Politicians mustthenpreparethepopulaceforafea -sible, modified reform initiative that moreaccuratelyreflectsthesepriorities. Politicsisoftendescribedas‘theartof the possible’.Initial reformefforts for Indonesia’s financial sector probably triedtodotoomuch,toofast.

IstheprimaryobjectiveinIndonesia todaytopurgethecountryofKKNand financial wrongdoers,ortorestartthe economy?Thereislittleevidenceofthe riseofanypoliticalmovementwishing toradicallyalterthetraditional waysof doingbusinessinIndonesia.KKNdid indeed reachunacceptable levelsnear theend oftheSoeharto regime,and a reductiontolowerandmoreacceptable levelswouldcertainlybefeasible.How -ever,toreduceKKNwithinashortpe -riodof timetothelevelsprevailing in OECDcountrieswouldrequirearadi -calpoliticalinitiative. Itisnotclearthat thepoliticalinstitutions existtopursue suchanagenda.Iftheywereformed,the likelyresultwouldbethedestruction of Indonesia’scontemporary management andpoliticalelite.

Iftheprimary objectiveis torestart the Indonesian economy, generating wealth and growth that can outpace population increases, past practices mayhavetobeaccommodatedwithin anynewpoliticalinitiativeforbanking sectorreform.Intheend,KKNisado -mestic politicalissue thatwill needto be resolved byIndonesians,ina man -nerthattheythemselvesdecide.Inthe past foreign lenders accommodated KKN,andsomemayevenhaveabetted

it, but embarrassment over such past behaviourshouldnotdistortthecurrent reformeffort.

Tobeimplemented successfully, the shapeofanyreformmovementshould ultimatelybeacceptabletoIndonesians, andbedeemedbythemtobepolitically feasible.Hereareatleasttwooptions.

First,reformersmightcontinuedown theexistingroad,butinanewfashion. The state mightabandon all pretence thattherehasbeennonationalisation of assets.TheMinisterofStateEnterprises mightutilise assetsfromexisting state enterprisesaswellasIBRA-administered assetstorationaliseandrestructure the economy.Advocatescouldarguethat,by mixingandmatchingassets,moreeffi -ciententerpriseswouldbecreated.

The state sector provides the only sourceofoperationalmanagementskills thatcoulddisplacethoseofthecurrent owners. This might help to break the currentpoliticalstand-offbetweenthe governmentandtheownersofthedis -tressedassets.Theresultcouldresemble Malaysia’s current mix of private but politically dominated conglomerates. ThismightappealtotheMuslimgroups whoseeMalaysiaasamodeltobeemu -lated.

Thenewgovernmentwoulddoubtless appreciatetheopportunitiesforpolitical patronage in such a restructuring of Indonesia’senterprises.Existingowners andthoseIndonesians seekingtoman -ageseizedassetswoulddoubtlesscom -pete vigorously for the privilege of helpingtoshape and managethe new economy.

Thispointsinthedirectionofamore statisteconomywithlittletransparency. Anyostensibleincreasesinefficienciesin corporategroupings orassetutilisation wouldbeoverseenbyapoliticisedbureau -cracyratherthanbymarketforces.

Analternative wouldbetomovethe political focus away from prosecution

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andKKNandtodepoliticise theissue. Thismightentailreplacingthe‘politics ofpunishment’ withthe‘politicsofre -demption’.Foreignadvisorsmayfind themoralimplications ofthisstrategy difficulttoaccept,butrealistically,ifim -proving the economy is paramount, greateraccommodationmaybeneces -sary.Asmattersstandtoday,thefirst waveoffinancialsectorreformhasset thenation’seconomiceliteanditsgov -ernmentatoddsinwhatiseffectively aneconomic civil war.The economic elitehasnofinancialorpoliticalinter -estinsupportingtheeffortsofthegov -ernment or implementing its reform program.Itsmemberscanonlylose.A programthatreplacesthestickwitha carrot,andthatcontainsthefollowing elements,mightbeconsidered.

(1) Thegovernmentwouldforswear furtherprosecutionofformerbankown -ers and recalcitrant borrowers in ex -change for their cooperation in once againgeneratingeconomicgrowth.

(2) Thefinancial‘sins’thataretobe forgivenwouldbefullystipulatedbe -tweentheformerbankownersandre -calcitrantborrowersontheonehand, andthegovernmentontheother.

(3) Indonesia’s current economic elitewouldbegrantedtheopportunity torepayitsoutstanding obligations to thegovernmentoncommerciallyreason -abletermsinlieuofseizureorconfisca -tionofassets.

(4) Indonesia’s current economic elitewouldgrantthegovernmentequity insuchenterprises inaproportionthat wouldrewarditforitsparticipation in anextendedrepaymentprogram.

Indonesia’seconomiceliteisunlikely tocompromiseonfinancialrestructur -inguntilthereisa stablegovernment withwhichitcanworkoutlong-term relations.The soonerthe government canfocusuponeconomic growth,the morequicklyitwillbecomestable.

Disclosuremightberequiredasacon -ditiontotherighttoenjoythebenefitsof anamnesty.Arequirementto disclose financialdetails would facilitate coop -eration and disclosure of the relevant economicdata for Indonesia.It would also,inaggregate,compromisetheeco -nomiceliteandthegovernmentinsuch awaythatgreaterdisclosures mightin futurebecomeapartofIndonesianeco -nomiclife.Thereshouldbenoillusion thatfulldisclosurewouldinfactoccur. Substantialdisclosurewouldrepresent meaningfulprogress.

IftheobjectiveistoreduceKKNand punishwrongdoers,thenthefulleconomic powerofthestatemayneedtobebrought tobear.A‘newelite’ratherthanforeign investorswouldentertheeconomy.Indo -nesiamightmoveinthedirectionofMa -laysiaratherthanSingaporeInc.

If the objective is to improve the economy,allowingIndonesia’seconomic elitetoworkoutitsobligationstothegov -ernmentin a commerciallyreasonable mannerwouldallyitsinterestswiththose ofthegovernment. Puristswillpointto thisasadanger,andtheywouldbecor -rect. That said, economic elites always influencetheirgovernments,andIndone -siamaybenefitmorefromthereinvest -ment of the financial resources and management expertise of its elite than fromthemarginalutilityofcurtailingits influence. Theinfluence is there, inall events,anditmaybemorehelpfulifhar -nessedtoachieveeconomicgrowth.

The requirement that former bank ownersandrecalcitrantborrowersgrant aportionoftheequityintheirenterprises to the government would allow such equitytobesoldovertimeintheIndone -sian publicmarket.This would widen the population of public investors in Indonesia’senterprises, whichwouldbe goodbothforpoliticsandforIndonesia’s capitalmarkets.Foreigninvestorsmight enterthecompaniesasfinancialrather

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thanstrategicinvestors.Thiswouldbe moreconsistentwithIndonesia’sstage ofeconomicdevelopmentanditspost -colonialhistory.

Whichever option is pursued—and there are many besides those noted above—considerationshouldbegivento implementing legislationthat separates the business of banking from thereal economy.Ifthereisalessontobelearned fromAsia’sfinancialcrisis,itisthatbank -ingandindustrialenterprisedonotmix. Ifsoundcredit decisionsaretobecome morelikely inIndonesia’spoliticaleco -nomy,banks(andtheirowners)should notownindustrialenterprises,andindus -trialenterprises(andtheirowners)should not ownbanks.Thisflies inthe faceof trendscurrentlypopularinOECDcoun -tries,butforeignadvisorsshouldrecognise thatIndonesia’seconomyatthestartof thenewmillenniumismuchclosertothe lateVictorianeconomiesoftheWestthan tocurrentWesterneconomies.

Givenitsrelativepaucityatpresent,it isunlikelythatthepoolofregulatoryand

financialsupervisory expertiseinIndo -nesiawilldevelopintheneartermtothe pointwherethereisthecapacitytosu -perviseasophisticated moderncapital market and financial sector along the linesofdevelopedOECDeconomies.In thewakeoftheEnroncollapse,thismay nowbeaneasierpointforforeignadvi -sorstoabsorb.Ratherthantryingtopre -tendthattherearenodifferencesbetween theemergingmarketsandthedeveloped nations,itmaybeprudenttostickwith what is simple and draw defendable linesforIndonesia’seconomicdevelop -ment. Such lines could then be re -examined as Indonesia’s economic developmentproceeds.

Finally,althoughmultilateral institu -tions should continue to give advice, they should probably withdraw from playing an active role in Indonesian politicaldebate.Solutionsthatareinthe firstinstanceinitiatedbyandacceptable toIndonesiansstandabetterchanceof beingimplemented,and ofbeingsus -tainable.

NOTES

* JakeRedwayisa partnerofLatham&

Watkins,aninternational lawfirm.He

haspractised in thefinancial services

sectorformanyyearsandwasactivein

Indonesiaduringtherecentcrisis.

1 ManagementofIBRA-controlledassets

issupposedtobeexercisedinaccordance

withagreementsenteredinto between

theagencyandtheformerownersofthe

assets.Theseagreementsattempttoim

-poseIBRA controloverallmaterial fi

-nancialdecisions,byrequiringthatthey

be approved by an IBRA-appointed

board.‘Operational management’ re

-mainswiththeformer owners.

2 Perhapsthesaddestexample oftheef

-fects ofthe lawof unintended conse

-quencesisthecaseofAstraInternational,

Indonesia’sprincipalautomobilemanu

-facturer.Beforethecrisis,Astrawascon

-sideredbymany tobetheIndonesian

enterpriseclosesttothe advancedeco

-nomic model heldup by Indonesia’s

economicreformers.Ironically, asa re

-sultofan earlierbank failure,owner

-ship and control of thecompany had

passedoutofthehandsofasingleIndo

-nesianfamily,and ownershipwas,by

Indonesian standards, broadly held.

When IBRA seizedthe assets ofbank

owners,itcameintopossessionofasig

-nificantandcontrolling blockof Astra

shares by accumulating 2–5% blocks

from formerbank owners.Thisblock

wasthensoldtoaSingaporecompany.

(TheveryfactthatAstra’sshares were

widelyheldmaybe one reasonthatit

could be s ol d w ith out e ntre nche d

organisedresistance.) ThusIndonesia’s

onetrue‘publiclyheld’companypassed

intothecontrolofasingleowner,anda

foreignoneatthat.Ifoneconsidersthe

ultimate beneficialowner ofCycle &

Carriage in Singapore, the argument

(11)

maybemadethatthewholeprocesshas

gonefull cycle,except thatthefamily

that nowcontrols thecompany isEn

-glishrather thanIndonesian. Itwillbe

interesting toseehowthenew‘control

-ling’shareholderandmanagementcome

to termsover time.

REFERENCES

Arndt,H.W. (1997).‘Bruce Glassburner,

1920–1996’,BulletinofIndonesianEconomic

Studies,33(2):41–8.

Johnson,Colin(1998),‘SurveyofRecentDe

-velopments’,Bulletin ofIndonesian Eco

-nomicStudies,34(2):3–60.