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Bulletin of Indonesian Economic Studies

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BOOK REVIEWS

To cite this article: (2008) BOOK REVIEWS, Bulletin of Indonesian Economic Studies, 44:2, 315-322, DOI: 10.1080/00074910802169160

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ISSN 0007-4918 print/ISSN 1472-7234 online/08/020315-8 DOI: 10.1080/00074910802169160

BOOK REVEWS

Miranda S. Goeltom (2007) Essays in Macroeconomic Policy:

The Indonesian Experience, PT Gramedia Utama, Jakarta, pp. 594. Rp 175,000.

Professor Miranda Goeltom is senior deputy governor at Bank Indonesia, with a long and distinguished career as an academic and policy economist at Bappenas (the national planning agency), in the ofﬁ_{ce of the Coordinating Minister for}

Economic Affairs and (for the past decade) in Bank Indonesia. She writes, with the beneﬁ_{t of inside experience, on a wide range of policy issues, mainly}

macro-economic.

For this reviewer, the most interesting chapters are those relating to the devel-opment of monetary policy. Over the past three decades the Indonesian ﬁ

nan-cial system has been transformed. Previously dominated by state-owned banks, the banking sector now includes well over 100 private banks (with signiﬁ_cant

representation from major foreign banks), while the state banks account for less than half of all banks’ assets. ‘Financial repression’ has gone, with non-bank alter-native sources of funding now provided by capital markets, through bonds and equities. Credit is no longer rationed through a closely controlled allocation proc-ess favouring the state-owned enterprises and guided by the central bank into ‘priority’ areas; now, the full range of ﬁ_{nance is available, with consumer loans}

for motor cycles and cars being the fastest growing and most proﬁ_{table part of}

banking. Monetary policy has gone from direct controls, through a period where money base control was attempted, and ﬁ_{nally to the current}

international-best-practice model of inﬂ_{ation targeting, using short-term interest rates as the}

instru-ment of policy. All this took great institutional change, not least in the central bank, with the need to develop the tools for a market-based monetary policy: a short-term money market and the instruments of open-market operations. During this transition there was the monumental disruption of the 1997–98 crisis, which saw the central bank’s reputation greatly diminished. The crisis also halved one commonly used measure of ﬁ_{nancial deepening: the ratio of bank credit to GDP.}

This story is told in a series of chapters covering the evolution from regulated

ﬁ_{nance towards in}ﬂ_{ation targeting; a detailed exposition of the trans mission}

mechanism of monetary policy; the problems of time-consistency; how the cen-tral bank communicates with the public; and the shift from a closely managed exchange rate to a much freer regime. Other chapters cover the institutional developments in policy making; the strengthening of governance in the banking system; and the widening of the array of ﬁ_{nancial institutions and instruments}

(including the development of the government bond market, one of the few ’side beneﬁ_{ts’ of the crisis). The relationship between monetary and}ﬁ_{scal policy, the}

1997–98 crisis, and the role of the International Monetary Fund during the crisis

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316 Book reviews

are all covered. A consistent theme is the inevitability of international ﬁ_nancial

integration and globalisation, and the problems and opportunities this presents. The focus here is on capital ﬂ_{ows: their effect on the exchange rate and the}

vul-nerability that comes from possible reversals of ﬂ_{ows. Regional cooperation has}

been active, particularly since the crisis, and especially between central banks: the Chiang Mai Initiative for pooling foreign exchange reserves, and the possibility of an ‘Asian Monetary Fund’ are discussed. Ranging more widely, chapters cover the role of women, reform of state-owned enterprises, and demographics.

This is a rich variety of policy challenges, and Professor Goeltom uses the opportunity to juxtapose theory and international analysis with the local realities, presenting views on how well (or imperfectly) the theoretical models ﬁ_{t the}

Indo-nesian reality. At times, the treatment is quite technical: economic modelling and simulations are used to illustrate aspects of the policy process.

Each of the chapters is a lightly edited version of earlier papers and speeches, mainly from around 2005–06, with some going back considerably further. This reﬂ_{ects Professor Goeltom’s consistent and active publication record, but it results}

in a fair amount of repetition, and coverage of issues which were overtaken by sub-sequent events. A book written from scratch would probably draw the underlying themes more sharply and capture the continuity and evolution of both policy mak-ing and the ﬁ_{nancial sector. We might have hoped that an ‘insider’ would give us}

more of the detailed ﬂ_{avour and cut-and-thrust of the policy process, and the}

polit-ical economy of Bank Indonesia as it came through this turbulent decade. This will, no doubt, have to wait until Professor Goeltom is no longer intimately involved in the policy process, when she may be freer to add the colour and context that is missing from the story told here. For the moment, we should be grateful that, in a country where detailed commentary by policy makers is still quite rare, Professor Goeltom has provided a contemporaneous commentary on so many issues of importance to the macro economy, and that these writings have been gathered together and edited into a consistent story of a ﬁ_{nancial sector in transition.}

Soren Davidsen, Vushnu Juwono and David G. Timberman (2006) Curbing Corruption in Indonesia 2004–2006: A Survey of National Policies and

Approaches, Centre for Strategic and International Studies, Jakarta, and United States – Indonesia Society (USINDO), Washington DC,

pp. xiii + 100, available at <http://www.usindo.org/ publications/reports/pdf/korupsi_web.pdf>.

With Indonesia’s democratisation, corruption has become a prominent political issue, manifested in frequent exposés of corruption cases in the press, indictments of government ofﬁ_{cials and both formal and informal political leaders for}

cor-ruption, and anti-corruption campaigns by government and non-government organisations. On the government side, two of the key agencies are the Corrup-tion EradicaCorrup-tion Commission (KPK) and the Coordinating Team for Eliminating Crimes of Corruption (Timtas Tipikor). This book surveys the current state of

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corruption in Indonesia, the approaches adopted to combat it and the constraints on effective anti-corruption efforts.

Given the coalition status of his government, President Susilo Bambang Yudhoyono (SBY) appears to believe there are limits to the government’s capac-ity continually to push the anti-corruption agenda. This book’s authors show that current anti-corruption efforts focus less on institutional reforms to reduce incentives and opportunities to engage in corruption, and more on prosecution of individuals who appear to lack strong political connections. Also, a strategy of wholesale replacement of government ofﬁ_{cials has been ruled out. Instead,}

sev-eral cases of corruption have been exposed and the perpetrators indicted with the intention of creating a deterrent. This approach is often dubbed ‘selective logging’ (tebang pilih). Not surprisingly, many ‘big ﬁ_{sh’ escape this process. The most}

nota-ble of these cases is the alleged corruption of former president Soeharto and his family. Only limited action has been taken against those in high positions in the Indonesian political hierarchy, particularly high-ranking government and party ofﬁ_{cials and the military. Against this background, combating corruption is}

con-siderably more complicated when the legal system that is supposed to enforce the law is itself plagued by corruption.

One urgent issue discussed in the book that has yet to be dealt with openly in the newly democratic Indonesia is how political parties ﬁ_{nance their activities.}

It is widely suspected that their major funding derives from abuse of power by corrupt government ofﬁ_{cials. This is similar to what happened during the}

Soe-harto era, when many government regulations and policies were the focus of seeking activities to provide funding for the regime.

The possibility of government funds ﬂ_{owing to parties’ coffers is exempli}ﬁ_{ed by}

a corruption case discussed in the book, involving prominent members of major parties. It is widely believed that the parliament (DPR) is another major conduit through which parties gain access to funding. Reportedly there are middlemen (calo) who can inﬂ_{uence the decisions of members on appointments to}

impor-tant public ofﬁ_{ces, the allocation of expenditures in the government’s budget, the}

speed at which draft legislation is processed and so on, in return for bribes. Funds received are thought to be used both to ﬁ_{nance political activity and to}

supple-ment members’ incomes.

An issue largely overlooked in the book is the way the anti-corruption movement at the local level has boosted the momentum of the campaign at the national level. The political consequences of tackling corruption are of considerable moment, so it is perhaps no coincidence that the ﬁ_{rst phase of SBY’s anti- corruption drive has}

focused mainly on cases in the provinces and districts. Even so, these regional cases have sometimes involved top-level ofﬁ_cials.

In these early stages, the power of top national political leaders and govern-ment ofﬁ_{cials appears still to be too strong for the government to prosecute its}

anti- corruption drive effectively at this level. Although the effort to eradicate corruption hitherto has mainly targeted individuals lacking strong links to top government ofﬁ_{cials and political leaders, the increasing number of}

success-ful prosecutions in the regions provides grounds for some optimism that these efforts can be replicated at the national level. Indeed, there is now a growing number of corruption cases before the courts that can be described as national in character.

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318 Book reviews

Another aspect overlooked in the book is the impact of democratisation on corruption at the local level. In the new democratic era, under a freer press, news-papers publish exposés; young and ambitious local prosecutors make reputa-tions through offi_{cial investigations and indictments;}fi_{rms and local of}fi_{ces of the}

national chamber of commerce can lobby legislators to protect ﬁ_{rms from of}ﬁ_cial

harassment and to discipline local ofﬁ_{cials; and local political parties may gain}

votes with anti-corruption stances. As demonstrated by the most recent elections for provincial governor in West Java and South Sumatra, corruption is a powerful political issue and may serve to garner electoral support (or turn off many less committed voters so that parties with more committed voters win the election). It remains to be seen how this phenomenon will be played out in the 2009 presiden-tial and legislative elections.

One ﬁ_{nal comment about the book is that those who are looking for in-depth}

analysis of corruption in Indonesia will not ﬁ_{nd it here. From the start the authors}

emphasise that the book is a ‘survey’ of the anti-corruption drive by the SBY administration. With this caveat, the volume is a valuable reference for those interested in the chronology of policies and approaches in the anti-corruption campaign during the ﬁ_{rst two years of the SBY presidency.}

Ari Kuncoro

Saw Swee-Hock, Sheng Lijun and Chin Kin Wah (eds) (2005) ASEAN–China Relations: Realities and Prospects, ISEAS Publications, Singapore, pp. xix + 375. Paper: S$49.90.

Saw Swee-Hock (ed.) (2007) ASEAN–China Economic Relations, ISEAS Publications, Singapore, pp. xiv + 376. Paper: S$49.90.

After an uneven process lasting four decades, the Association of Southeast Asian Nations (ASEAN) has developed into one of the world’s most successful regional inter national organisations. However, evolving global and regional conditions have provided ASEAN with a new set of challenges and opportunities. The impli-cations of China’s rise for ASEAN and its relationships with other major powers represent one area of heated debate.

Intended as a platform for research on this debate, the ASEAN–China Forum was hosted by the Institute of Southeast Asian Studies (ISEAS) in Singapore in 2004 and 2006, with the latter event dedicated to discussions on economic cooper-ation and challenges. An edited volume was published by ISEAS following each event. As their titles suggest, the books share a common theme about the present and future status of ASEAN–China relations. The editors begin each book with an introductory chapter providing an overview of the areas covered. Both volumes also include chapters that probe the overall relationship between ASEAN and China and the quest to realise a strategic partnership. Whereas chapters 2 and 3 of the 2005 book set an explicitly positive and optimistic tone preceding the more detailed deliberations in later chapters, the 2007 volume looks at China and ASEAN separately in chapters 2 and 3, before opening the discussion on their

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relationship. Towards the end, the 2007 book introduces more caution into its overall assessment, describing the likely character of the relationship as ‘tango together but watch each other’s steps’ (ch. 14: 311).

The 2007 publication investigates a number of speciﬁ_{c aspects of economic}

interaction between China and ASEAN. Trade issues, particularly in the con-text of the establishment of an ASEAN–China Free Trade Agreement (ACFTA), are discussed in chapters 5–7, which canvass not only the economic pros and cons but also the legal and institutional aspects of ACFTA. In view of the global trend towards services trade and investment, chapter 8 examines efforts at serv-ices liberalisation, while chapters 9 and 10 consider the Asian bond market and ASEAN–China investment cooperation. Developments in energy cooperation (ch. 11) and business networks (ch. 4), as well as China’s role in regional and sub-regional development (chs 12 and 13), are examined in greater detail. However, the underlying factors that affect economic relations often transcend economics narrowly deﬁ_{ned. For instance, not least due to geopolitical proximity, the pursuit}

of ASEAN–China relations is underpinned by a blend of political, foreign policy and economic considerations. While there has been progress in the institutionali-sation of ASEAN–China economic relations, the prospects of further interaction will need to be discussed in the context of the developing relationship in other arenas, and of the future of ASEAN as a multilateral organisation facing a ‘width vis-à-vis depth’ challenge.

The earlier volume provides a broader overall understanding of ASEAN–China relations, with its wide coverage of topics, ranging from regional security cooper-ation to the external challenges confronted by ASEAN. It also covers a number of important aspects of economic cooperation, such as prospects for the ASEAN+3 framework (ASEAN plus China, Japan and South Korea; chs 6 and 7), the emer-gence of an East Asian Community (chs 16 and 17) and China’s business environ-ment (chs 18 and 19). From a diverse range of perspectives, the authors identify and elaborate on issues of great importance to individual countries and to the region as a whole. Together, the discussions reﬂ_{ect the subject’s multi-dimensional and}

complex nature. For example, numerous chapters (chs 12–15, 22 and 23) are dedi-cated to discussions of China’s role in addressing both the internal concerns and the external threats confronting Southeast Asia. Discussion of regional issues in this volume also includes China’s role in promoting the ASEAN Regional Forum (chs 4 and 5), the development prospects of the Mekong sub-region (chs 20 and 21) and the implications for the dynamics of ASEAN–China relations of ASEAN’s links with Japan, the US and India (chs 8–11).

A remarkable feature of the two books is that they have brought together the contributions of a myriad of talents. In particular, the 2005 volume goes far beyond the realm of academia. The diverse authorship includes prominent ofﬁ_{cials of}

ASEAN, a general in China’s People’s Liberation Army, policy makers and advis-ers, and academic experts from both the ASEAN countries and China. As a result, it not only provides a relatively balanced view of China and the other countries but also allows for tremendous synergistic power.

In sum, the two volumes are complementary, with one providing a compre-hensive discussion of the overall situation and ways forward, and the other focus-ing on ASEAN–China economic ties. They demonstrate that the future of ASEAN lies in improving the cohesion and integration of the region on the one hand, and

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320 Book reviews

remaining inclusive, and evolving in step with the changing global and regional environment, on the other. Given the scope of the 2005 book, readers may have ben-eﬁ_{ted if the chapters had been organised more coherently, perhaps around themes.}

It is also worth noting that since these books were published there has been further progress within ASEAN (for example, the establishment of the ASEAN Charter in 2007) and in its relations with China. There is little speciﬁ_{c discussion of Indonesia}

in the two books, but BIES readers will ﬁ_{nd them a useful source of information in}

the search for a better understanding of the future of ASEAN.

Tao Kong

Denis Hew Wei-Yen (ed.) (2007) Brick by Brick: The Building of an ASEAN Economic Community, Institute of Southeast Asian Studies,

Singapore, pp. 252. Paper: S$39.90/US$25.90/A$36.00.

ASEAN’s leaders have agreed to create an ASEAN Economic Community by 2015. This timely volume, published soon after that decision was taken, seeks to set out the scope and difﬁ_{culty of achieving this objective.}

The task of building an economic community has been widely interpreted as the creation of a single market. Chapter 2, by Peter Lloyd, presents a strict, and ambitious, deﬁ_{nition of a single market. In such a market, all policy impediments}

to economic transactions would be eliminated, so that the price of all goods and services, as well as the prices of all mobile factors of production (including labour and capital), would be the same in all participating economies. The European Union (EU) comes closest to such a highly integrated market. However, more than 50 years after the Treaty of Rome, the EU has a considerable way to go to meet Lloyd’s deﬁ_{nition of a single market.}

Chapters 3 to 9 discuss some important dimensions of the integration of ASEAN economies. They assess the present extent of integration in terms of trade in goods and services and investment, noting that a great deal has already been achieved. At the same time, the chapters foreshadow the many further steps that will be needed. In particular, they highlight the problems of integrating economies at very different stages of development.

These assessments indicate that there will not be a fully integrated market among ASEAN countries by 2015. Like APEC, which committed itself to achieve the unattainable ideal of ‘free and open trade and investment’ by 2010 (for trade) and 2020 (for investment), ASEAN has created excessive expectations. Once again, the solution is to use long-term vision to accelerate the ongoing process, and to set attainable milestones for some signiﬁ_{cant aspects of integration. Chapter 6 offers}

useful and speciﬁ_{c suggestions for measurable progress.}

The volume makes it clear that the challenge of deep economic integration is the need to do far more than get rid of border barriers to trade and investment. The extent of policy harmonisation that will be needed goes well beyond the scope of any of the so-called free trade agreements that have been negotiated. In fact, the many bilateral agreements negotiated by individual ASEAN economies have not promoted efﬁ_{cient specialisation among them. The discriminatory rules of origin}

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lurking in these agreements discourage intra-industry trade among ASEAN econ-omies, limiting their prospects for competing in external markets, which account for over three-quarters of ASEAN’s exports.

The editor has done well. His chapter 2 provides an excellent overview of the book, and the authors have been carefully selected to cover the full range of issues involved in creating an economic community. As the title suggests, the challenge can best be met by taking sensible, practical steps building on earlier achievements. In that way, ASEAN can expect to become progressively more integrated, with mutual beneﬁ_{t to each economy, by 2015, even if impossible ideals are not met.}

Andrew Elek

L. Alan Winters and Shahid Yusuf (eds) (2007) Dancing with Giants: China, India, and the Global Economy, Report No. 38339, The World Bank, Washington DC,

and Institute of Policy Studies, Singapore, pp. xvi + 272, available at <www-wds.worldbank.org/>. Paper: US$ 22.95.

This multi-author volume is a welcome addition to the bourgeoning literature on the awakening from economic slumber of the two Asian ‘Giants’, China and India, and its likely impact on the world economy. All chapters in the volume have been authored or co-authored by World Bank economists, drawing on papers commis-sioned from prominent scholars in the ﬁ_eld.

The introductory chapter by the editors provides a succinct overview of the patterns of integration of the ‘Giants’ into the world economy and the challenges the two powers pose to other countries. It also previews the subsequent chap-ters. The next two chapters deal with the interaction of the ‘Giants’ with other countries through international trade: chapter 2 by Yusuf, Nabeshima and Perkin provides a bird’s-eye review of China’s and India’s evolving industrial capabili-ties and trade patterns, and chapter 3 by Dimaranan, Ianchovichina and Mar-tin complements this industry-focused analytical narrative with a quantitative analysis using a global economy-wide modelling approach. A major limitation of the analysis in both chapters is the failure to take into account trade complemen-tarities arising from the integration of China (and possibly of India in the future) into rapidly expanding global production networks. The authors do mention this phenomenon in passing, but the analytical core is based entirely on the traditional notion of horizontal specialisation in which countries trade solely in goods pro-duced entirely, from beginning to end, within one country.

The model simulation results reported in chapter 3 suffer from some additional limitations. First, the discussion here does not have sufﬁ_{cient transparency to}

make the ﬁ_{ndings and inferences convincing. For instance, in the absence of}

ade-quate explanation, it is hard to fathom how one can manage to calibrate compli-cated scenarios such as ‘growth focused on … relatively sophisticompli-cated products’ (p. 69) and ‘strong growth in quality and variety of exports’ (p. 80) within the standard computable general equilibrium (CGE) framework. Second, as regards the macroeconomic closures used in the analysis, the assumption of ‘a constant levelling of employment, with perfect mobility of skilled and unskilled labour

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322 Book reviews

between sectors and none between regions’ (p. 82) sits rather uncomfortably with the prevailing ‘surplus labour’ conditions in the Chinese economy that are viv-idly depicted in the background paper by Richard Cooper. Third, the available input–output tables for both China and India, which form an integral part of the data base, are of the ‘competitive import type’ (that is, they do not differentiate between domestic intermediate goods and imported intermediate goods). CGE modelling, therefore, requires artiﬁ_{cial separation of imported inputs and}

domes-tic inputs based on the assumption that imported inputs are used in each indus-try in the same proportion as indicated in the original input–output tables. This is an implausible assumption, particularly for export-oriented manufacturing in China, which depends heavily on imported inputs.

Chapter 4, by Lane and Schuler, examines the implications of the emergence of the ‘Giants’ for the reshaping of the international ﬁ_{nancial system; it also explores}

the relationship between the external ﬁ_{nancial positions of the ‘Giants’ and the}

reforms and developments in their domestic ﬁ_{nancial systems. If one had to}ﬁ_nd

fault with this well written chapter, it would mainly be with the inadequate dis-cussion of the policy implications of the authors’ conclusions. In chapter 5, Zmarak Shalizi examines issues involved in managing energy supply and demand in the two countries, and undertakes model simulation exercises to yield emission tra-jectories to 2050. However, because of the highly aggregated nature of the model used, the chapter fails to come up with speciﬁ_{c policy recommendations tailored}

to the unique opportunities and constraints in each country.

Chapter 6 by Chaudhuri and Ravallion is perhaps one of the best available analyses of the distributional impact of the growth process in the two countries. With the help of a carefully designed set of tables and ﬁ_{gures, the authors}

convinc-ingly demonstrate why some segments of the population have been left behind in relative terms; this can be explained by the fact that ‘they [the “Giants”] are only partially awake in that segments of their societies remain (relatively and abso-lutely) dormant’ (p. 176). There is also strong empirical support here for the view that the sustainability of reforms and the growth process depends crucially on the effectiveness of policies to redress unevenness. While this inference pertains to both countries, China bears the greatest near-term risk that rising inequality will jeopardise growth.

Chapter 7 by Philip Keefer deals with the importance of the governance envi-ronment for the sustainability of growth and development. The chapter comes up with the rather optimistic inference that both India and China have begun to reveal signs of a virtuous circle, signs that growth can help propel governance reform, ensuring successful continuation of the process of reform and economic advancement. However, this reviewer failed to see how this prediction followed from the econometric analysis or the case histories presented in the paper. It is also not consistent with inferences by some other well-informed observers about unresolved governance issues faced by India and China.

Notwithstanding the above criticism of individual chapters, this is an impor-tant book on a subject of immense policy relevance. In particular, policy makers in Indonesia and other countries in the region will ﬁ_{nd much to learn from it on how}

to ‘danc[e] with the Giants without getting one’s toes stepped on’.

Prema-chandra Athukorala