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Bulletin of Indonesian Economic Studies
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
Book Reviews
Jamie Mackie , H. W. Arndt , Graeme Dorrance & Peter van Diermen
To cite this article: Jamie Mackie , H. W. Arndt , Graeme Dorrance & Peter van Diermen (2000)
Book Reviews, Bulletin of Indonesian Economic Studies, 36:3, 137-145
To link to this article: http://dx.doi.org/10.1080/00074910012331339033
Published online: 18 Aug 2006.
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BOOK REVIEWS
Stephan Haggard (2000), The Political Economy of the Asian Financial Crisis, Institute for International Economics, Washington DC, pp. xvii + 272.
This comprehensive and very thorough account of the Asian financial crisis of 1997 and 1998, focused mainly on the four worst affected countries—Thailand, South Korea, Malaysia and Indonesia—is an example of ‘political economy’ at its best. It will be of value to students of Indonesia’s economic policies also, for several reasons. First, it enables us to see her experience of the crisis—its causes, course and outcomes— in a comparative perspective alongside those of the other three, drawing out the reasons why Indonesia has been hit so much harder than the others (after a quite promising start), as well as the lessons to be drawn from that. Second, by ‘bringing the politics back in’ it reveals the interplay of political and economic factors in the decision making processes of each, both at the onset of the crisis and in later policy responses to it. Third, it gives useful summary accounts of the policies of the Soeharto and Habibie governments during the crisis—although inevitably not much on the current Wahid government—along with a convincing analysis of the socio-economic and political dynamics behind them (and of policy in the other three countries, plus briefer comments on those least affected by the crisis: Singapore, Taiwan and the Philippines). Haggard’s depth and breadth of understanding of both the domestic politics and economic policies of all these countries is unrivalled, as also of the issues at stake on the business–government relations side throughout the region, especially in South Korea and Taiwan. But he is good on Indonesia too, acknowledging collaboration with his UCSD (University of California, San Diego) colleague Andrew MacIntyre in the several sections on that country.
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countries because of their political history and institutions, greatly affected the capacity and inclination of governments to handle the adjustment process in timely, coherent ways. Close relations between government and the leading business groups may have been advantageous to government policy making in some ways during the fast-growth decades before the crisis, but they became an obstacle to adjustment after it, because they gave rise to distortions of the liberalisation process, greater vulnerability to shocks, and poor handling of moral hazard issues. Non-democratic governments had no advantages over Non-democratic ones in coping with the crisis, he argues—contrary to the views of the ‘Asian values’ and ‘strong government’ school, like Lee Kuan Yew—and in the case of Indonesia and Malaysia they responded far less well. Haggard’s analysis of Malaysia’s policy responses, in particular, was one of the best I have yet seen.
Of the several sections dealing with Indonesia, I thought the best were the account of how the July 1997 crisis led ultimately (but erratically) to Soeharto’s downfall in May 1998—despite the fact that his initial handling of it was ‘more decisive and coherent’ than in either Thailand, South Korea or Malaysia—and the brief but perceptive account of the social safety net policies attempted by the Habibie government in 1998–99. An overview of corporate and financial restructuring measures in 1998–99 is useful, but almost too detailed, without adding much to what is already well known. The section on the tensions between the political pressures compelling Habibie towards demokrasi dan reformasi after Soeharto’s fall and the constraints imposed on him by ‘his on-going links to private-sector groups that were critical to financing his political ambitions’ (and to the still influential Soeharto-connected big-business interests fighting for survival) is intriguing, but less illuminating than one might wish.
I have only three minor criticisms of this book. It is so densely packed, so full of illuminating factual data and sheer good sense (a rare commodity in the political economy game), backed by amazingly wide reading, that the reader at times loses sight of the wood for the trees—although Haggard’s underlying theoretical assumptions (basically institutionalist) and policy recommendations are clear and explicit. There is almost nothing on ‘the Chinese problem’ which is still central to all equity and wealth distribution issues. And on Indonesia it ignores what I regard as the fundamental structural problem facing any post-Soeharto government, that of dismantling the tangled web of clientelist relations and the essentially patrimonialist character of the New Order regime. That has not yet changed significantly since Soeharto’s downfall, despite the dramatic transformation from his strong, highly concentrated power structure to a weak, increasingly dispersed distribution of both political and economic power. There is a major story to be told there.
Jamie Mackie ANU
Colin Barlow (ed.) (1999), Institutions and Economic Change in Southeast Asia: The Context of Development from the 1960s to the 1990s, Edward Elgar, Cheltenham, pp. xi + 204.
The idea of this book, as the editor explains in his Preface, arose in 1992 during a series of seminars at ANU, but took this shape only in 1997 when he brought together a band of eminent contributors.
The book addresses the role of institutions in the development of Southeast Asia. The economic theory of institutional change is expounded in an erudite chapter by Justin Lin. ‘An institution can be perceived as a set of behavioural rules commonly observed by individuals in a society’ (p. 9). For example, ‘large modern hierarchical business enterprises compete with markets as alternative institutions in coordinating production and allocating resources’ (p. 8). This is followed by eight chapters on institutions in individual Southeast Asian countries and a final chapter, by David Vines, on global economic institutions from a Southeast Asian perspective.
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form of private nurseries and smallholder projects have helped bridge the gap between modern and traditional sectors. The second, by Manning, deals with institutional change in the labour market in Java. Political and social changes led to two quite different institutional arrangements, those imposed by the state through controls over organised labour and those induced by alterations in rural labour markets associated with the green revolution. The third, by Hadi Soesastro, traces the evolution of government institutions in Indonesia during the 30 years of the New Order, with initial strengthening of the bureaucracy and centralised economic management, followed by deregulation in the 1980s and rampant cronyism in the 1990s. The chapter by Mackie on the role of overseas Chinese entrepreneurship in Southeast Asia also has much of interest on the Indonesian case.
While these four chapters will be of particular interest to readers of BIES, those on Malaysia, Thailand, Vietnam and the Philippines are also stimulating.
H.W. Arndt ANU
Asian Policy Forum, Asian Development Bank Institute (Forum Secretariat) (2000), Policy Recommendations for Preventing Another Capital Account Crisis, Asian Development Bank Institute, Tokyo, pp. ii + 16.
Masaru Yoshitomi and Sayuri Shirai (2000), Technical Background Paper for Policy Recommendations for Preventing Another Capital Account Crisis, Asian Development Bank Institute, Tokyo, pp. ii + 85.
An earlier ADB Institute Report held the more tenable view that the crisis arose largely because ‘financial intermediaries … (were) … not always free to use business criteria in allocating credit as well connected borrowers could not be refused credit that was frequently granted with implicit or explicit government guarantees’ (Moreno et al. 1998).
By the end of 1996, at the latest, it should have been clear that a conventional crisis was imminent. Massive short-term capital inflows that could not be offset by monetary authority stabilisation induced monetary institutions to expand domestic credit at rates well beyond the increases in output, and at multiples of the rates in other progressive countries. This credit expansion was almost certain to create expenditure in excess of production, with the consequent balance of payments crisis. The Technical Background Paper rejects a freely floating exchange rate and favours the adoption of a narrow band within which the rate floats, but does not discuss variations of the band.
For many years, The Netherlands set the daily mid $/guilder rate at the previous day’s closing rate, and the Netherlands Bank intervened if the market-determined rate moved more than 1% from that value. This policy ensured that the rate reflected underlying economic influences, but was isolated from the temporary effects of large individual transactions. A system such as this might be considered by countries in Southeast Asia, searching for exchange rate stability with flexibility.
The Report accepts the irrational IMF-endorsed principle that the reference basket for the exchange rate of a country’s currency should be based on the currencies of the countries with which it trades commodities. Commodity trade accounts for less than one-half of international transactions. There is no reason to expect that transactions on services, income, and capital accounts will have the same currency of settlement pattern as trade in commodities. Many commodity transactions are settled in the currencies of price quotation, rather than in those of the countries of provenance and destination. With the importance of major countries in Asian trade, it might be more reasonable to suggest the SDR (Special Drawing Rights) rather than a trade-weighted basket as a reference benchmark.
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markets. To prevent disequilibrating capital movements, it is more important that ‘sound macroeconomic performance is sustained and fiscal policy is supportive’, than to engage in discriminatory controls.
The valid criticism of East Asia’s economic structures (Djiwandono 2000; Moreno et al. 1998) gives weight to the view that Asian countries ‘should adopt … best practice in prudential regulation and supervision’ of financial and other institutions. The Report refrains from making specific recommendations and the Background Paper is vague. The IMF’s 53 macroprudential indicators, which do not include the level of inflation (Hilbers et al. 2000), are too long a list of items for a country strengthening a weak system. A set of requirements probably based on, but not detailed duplicates of, the ‘Basle standards’ might be adopted for all financial institutions. The development of, and required adherence to, such standards would not only reduce the likelihood of financial crises, but also probably increase the efficiency of those receiving credit.
‘Sound, liquid domestic capital markets’ are desirable institutions in all countries. Stock exchanges are useful in countries where many families have annual incomes equivalent to $100,000–250,000, but it does not follow that they should be encouraged as repositories for private savings where typical incomes are much lower. Unless a family can accumulate large enough holdings of a wide range of securities to avoid the relatively large costs of individual transactions, the desirable liquidity of their asset holdings will almost certainly be subject to continued stock exchange volatility. For most families, financial protection is better preserved in holdings of insurance, retirement policies and mutual funds.
Acceptance of the Report’s encouragement of bond finance would introduce an element of rigidity to financial flows in economies that are likely to be more subject to fluctuations than high-income ones. The essence of the Modigliani–Miller theorem (Modigliani and Miller 1961) is that, contrary to the Background Paper’s statement, bonds do not reduce the total effective cost of finance.
The Report supports present restrictions on non-resident holdings of domestic currencies. The maintainence of sound macroeconomic (defined as covering the complete range of) policies will do more to avert the speculative dangers of such holdings than any prohibitions.
As the Report assumes that Asian crises are ‘different from … conventional current account crises’, it recommends that a Regional Financial Arrangement (RFA) should be established ‘that would provide a lender of last resort facility … immediately … available for the requesting economy’. As the assumption supporting this recommendation is questionable, it follows that there is little logical support for it.
Graeme Dorrance Sydney
Notes
1 The Technical Background Paper refers to most of the literature on the 1997–98 crisis, but fails to refer to articles in this Bulletin.
References
Djiwandono, J. Soedradjad (2000), ‘Bank Indonesia and the Recent Crisis’, Bulletin of Indonesian Economic Studies 36 (1): 47–72.
Hilbers, Paul, Russell Krueger and Marina Moretti (2000), ‘New Tools for Assessing Financial System Soundness’, Finance and Development 37 (3), International Monetary Fund, Washington DC.
Modigliani, Franco, and Merton Miller (1961), ‘Dividend Policy, Growth, and the Valuation of Shares’, Journal of Business 34.
Moreno, R., G. Pasadilla, and E. Remolona (1998), ‘Asia’s Financial Crisis: Lessons and Policy Responses’, in R. Moreno and G. Pasadilla (eds), Asia: Responding to Crisis, ADB Institute, Manila: 1–27.
Marieke Kragten (2000), Viable or Marginal? Small-scale Industries in Rural Java (Bantul District), Royal Dutch Acadamy of Sciences and Faculty of Geographical Sciences, Utrecht University, Utrecht, pp. 197.
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number of small-scale rural-based industries. In producing this book, Kragten spent several years investigating the ‘main factors conditioning rural diversification and industrialization’ and attempting ‘to clarify the role of industrial activity in the household economy’ (p. 14). Her findings, interestingly, do not always conform to what would be expected from the existing literature. Moreover, she has not adjusted her hypotheses to fit with her findings, and readily and refreshingly admits that the findings do not support several of her hypotheses.
The book is divided into seven chapters, with a separate introduction that identifies the work as part of a much wider joint project between Gadjah Mada University and Utrecht University on rural and regional development planning. As is traditional with this kind of publication, the book also includes a short abstract in Dutch. The general structure of the volume follows very much that of a thesis, with a literature review and background chapter presented first, followed by the case study chapters and analysis. An interesting technique is the use of a series of related questions at the beginning of each chapter—this works well.
The introduction presents the book’s theme and sets out the objectives, concepts and methodology, as well as briefly outlining each of the chapters. Chapter 1 covers the literature on rural diversification and industrialisation. From the literature, the author identifies three forms of rural industrialisation. The first type is ‘supply-push labour’, which occurs in response to excess labour in the agricultural sector. Second, increasing manufacturing productivity leads to demand-pull industrialisation, often associated with agricultural processing industries. Finally, non-agricultural associated industrialisation occurs in response to niche market opportunities. The second and third categories are found to be more viable.
Chapter 2 provides the obligatory background information on rural diversification and industrialisation in Java, while chapter 3 gives a detailed description of the Bantul district. Together, they present an extremely good coverage of the region’s economy. Maps are liberally used to illustrate the distribution of land use, income and several other socio-economic variables.
Chapter 5 focuses on specific industrial clusters within the district. These were found to be more dynamic than the dispersed industries surveyed in the previous chapter. None of the clusters represented the type of new industrial organisation often referred to as ‘flexible specialisation’ and found in Europe. However, clusters did provide entrepreneurs with information and access to a large pool of labour, and to supplier networks.
Chapter 6 provides a discussion of some of the key findings. Among these were, not surprisingly, that the extensive government programs for clusters and small-scale industry had been of limited use. Second, location and historical development were important variables explaining rural industrial development. For example, villages with a long history in handicrafts were more likely to develop into clusters of small-scale industrial activity. The great variation between locations was also heavily influenced by the availability of cheap skilled labour, by access to information, and by the existence of successful entrepreneurs who acted as exemplars.
This book represents a detailed discussion of a very specific topic and location, and should appeal to readers interested in Indonesia, rural diversification, and small-scale industries. It makes a valuable contribution to the literature, complementing earlier work by other Dutch scholars.
