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BOOK REVIEWS
To cite this article: (2002) BOOK REVIEWS, Bulletin of Indonesian Economic Studies, 38:2, 251-264, DOI: 10.1080/000749102320145084
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ISSN0007-4918print/ISSN1472-7234online/02/020251-14 ©2002Indonesia ProjectANU
TimLindseyandHowardDick(2002),CorruptioninAsia:RethinkingtheGoodGover
-nanceParadigm,FederationPress,Sydney,pp.240.Paper:A$55.00.
theorised’,leadingto‘definitionalcon -fusion,fuzzypolicy,flawedprojectsand ineffectualreforms’.Justasearlieraidto ‘theeconomy’waswastedbecauseitig -noredpoliticalrealities, sogovernance programsoftenactasiftheycanavoid confrontingvestedpowerstructures. In Dick’swords,‘institutionalreformisnot apoliticallydisembodied “quickfix”’.
Asacontribution toovercomingthis posited paucity of theory, the volume endeavours to establish some frame -workstoexaminethecategoriesofgov -ernance, corruption and legal reform, andtotestthoseframeworksinthecases ofIndonesiaandVietnam,andinacom -parativepieceonformerSoviet-blocEu -rope.KanishkaJayasuriyaidentifiesthe newprominenceofgovernanceaspart ofa‘post-Washingtonconsensus’,which heseesasretainingkeyelementsofthe oldWashingtonconsensusofopenmar -kets,liberalisationandstructuraladjust -ment.Inparticular, thenewconsensus retains an instrumentalist attitude to ‘politicsastheeffectiveimplementation of agreed technicalprocedures’ rather thanasanarenaofconflict,bargaining andcompromise.Lindseyalsoseesmore continuities than discontinuities inthe apparentlynewthinkingongovernance, andconcludesthat‘thereislittlereason tobelieve thatthelessonsofthe 1970s have been learnt’. Dick argues for a
BOOK
REVIEWS
‘Governance’ hasbecomea prominent buzzwordamongdevelopmenttheorists andtheinternational aidcommunityin recentyears.Alternative critiquesofde -velopment theory and bureaucracies havelongarguedthatwecannotunder -standhownationsbecomewealthyus -ingabstracteconomicmodelsthatdonot take account of socialrealities such as class andpower relationships and the historicallegacyofstateinstitutions.
Manyofthemattersraised(ifnotthe conclusions reached)bythesecritiques havebeenadoptedintothethinkingand practice of international development agencies. This hasincluded the inner policysanctumsoftheWorldBankand, toalesserextent,theIMF.TheAsianeco -nomic crisis of 1997–98,withthesud -den end to growth in countries that seemedtohave‘gotthepoliciesright’, was instrumental in strengthening doubts about the sufficiency of GDP growthinitselftoprovideforbothpros -perityanddemocratisation. Theappear -anceimmediately beforethecrisisofthe WorldBank’sreportontheroleofthe state showedthat thisrethinking also hadalongerpedigree,particularly un -derBankpresidentJamesWolfensohn. Nevertheless,theeditorsofthecollec -tion under review, Tim Lindsey and HowardDick,arguethatnotionsofgov -ernanceandcorruptionarestill‘under
deconstructionoftheterms‘governance’ and‘corruption’,whichhesayswould revealtheirpolitical(ratherthantechno -cratic)intentas part ofthe‘neo-liberal reformagendapromotedbytheIMFand theWorldBank’.
Themore theoretical articles in this collectionthusintroduceastrongcritique ofthenotionof‘goodgovernance’,argu -ingthattheideafailstotakeaccountof thepoliticalnatureofeconomicdevelop -ment,whileatthesametimebeingsuf -fusedwithitsownpoliticalagenda.The promisethatthecritiquewillbetestedby theotherauthors isnotreallyfulfilled, however.Asinmostmulti-authoredcol -lections,thecontributions varyinqual -ityandreflectthedifferinginterestsand backgrounds ofthecontributors. While allprovidegoodinsightsintocorruption andlegalreformintheirrespectivesub -jectcountries,fewexplicitlycometogrips withtheissuesraisedinthetheoretical critique.
GaryGoodpaster,forexample,pro -vides averyusefuldescriptionof the natureandcharacteristics ofcorruption inIndonesia.Buthisonlyreferenceto thecriticalthesesofthecollectionisto rejectthem,suggestingmerelythatthe problemis‘donorimpatience’.Hecon -cludes that IMF/World Bank condi -tionalitydoeshavea long-term effect inforcingreluctantgovernmentstore -form.Otherarticles,particularlythose onthereformof legalandjudicial in
-stitutionsandthecreationofanti-cor -ruptionagencies,implicitly orexplic -itly highlight the political difficulties ofovercomingtheresistanceofpower -ful vested interests. But none of this would surprise anyinternational do -norofficialwithagood knowledgeof hisorherposting.
Whatthebookdoesachieveistopro -videexcellenttheoretical andempirical materialforrethinkingthegovernance paradigmand,byextension,theroleof internationalfinancialanddevelopment institutions.Itisatimelycontributionto adebatethatmustbehad.Theparadox, however,isthatthosebestplacedtodo therethinkingaredependentonthevery institutions theywouldseektochange. Astheeditorspointout,‘jobsarebeing createdandgoodconsultancy ratesare beingpaidinthisnewbranchofthede -velopmentindustry’,whatevertheeffi -cacyofaidforgoodgovernance.Foreign assistanceprogramswillchugalongre -gardless,inresponsetotheirowndiplo -matic and bureaucratic imperatives: relationships maintained and budgets expended. This collection calls for a pauseforthought,tostartadialogue‘be -tweentheworldasitisandtheworldof ideals’, without which all the dollars outlaidwillhavelittleeffect.
StephenSherlock InformationandResearchServices ParliamentofAustralia
R.E.Elson(2001),Suharto:APoliticalBiography,CambridgeUniversityPress,Cam -bridgeandMelbourne,pp.xxi+389.Cloth:A$59.95.
tomeabalancedandbroadlyconvinc -ingone.HisaccountofhowSuhartothen consolidatedhisgriponstatepowerand begantoshapetheNewOrderregime between1966and1971ismasterly,asis thestory ofhow hisrelationswiththe Armytopbrasschangedbetween1982 and1993,almostimperceptiblybutfate -fullyforIndonesia’sfuture.
The key parts played by Widjojo, Sadli,AliWardhanaandtheothertech -nocrats inshaping theeconomic poli -cies that und erpinned Ind onesia ’s ‘economic miracle’are well described (butbriefly,andareperhapsashadetoo understated) as also are their roles in helpingtoeducateSuhartointherudi -mentsofeconomicsintheearlyyearsof hispresidency.Itisapity thatthede -clineintheirinfluenceinhislateryears had to be dealtwith so briefly, when goodtimesledtobadpolicies,enabling cronycapitalismandnepotismtotake over disastrously. ‘The technocrats madeenormouseffortstoshapeanew economiclandscape,butwereunableto alterfundamentallythesocio-political contextgoverningthe[political]environ -ment…Whatemergedwasanimpres -sivefacade.’Elsonshowswellhowgood governanceand soundeconomicpoli -cieswereundermined bythepolitical ills that proliferated during the last decadeorsoofSuharto’shighlyperson -alised and increasingly authoritarian rule.Thebookisnotofcourseprimarily concerned with Suharto’s economic policies so much as with how he bal -ancedthepoliticalpressureshehadto copewith;buttheformerloomlargeat sev eral points, especia lly 1966–68, 1974–76and 1986–89,all ofwhich are analysedcogently,althoughfairlycon -ventionally.
President Suharto’s crucial role in the transformationofIndonesiafromaneco -nomic basketcasein1965–66 to‘Asian Tiger’statusintheearly1990sisreason -ablywellunderstoodintermsofbroad economicpolicy.Butthemindandmoti -vationsofthemanhimselfhavealways beensomethingofapuzzle.Andtherea -sonsforhislaterslidefrompredominantly successfuleconomicpoliciesduring his first20yearstowardsthefatalaberrations of the mid 1990s arestill shrouded in mysteryatadeeperpersonallevel.
Elsontells thestoryofSuharto’s life superbly in this authoritative andvery readablebiography.Itwilllong remain essential readingforanystudentofthe NewOrderanditspoliticaldynamics,of value also for hard-nosed economists searchingfortheoreticalexplanationsof the miracle Suharto wrought.‘Suharto wasbornintoapoorpeasantfamily’,he writes,‘buthepresidedoverhiscountry’s industrialtransformation andisthought bymanytocontrolafamilyfortuneworth billionsofdollars.Suchparadoxisakey motifofhislife;togetherwithhispublic maskandevasive,undemonstrativeman -ner,itmakesthetaskofattemptingtoun -derstandthemanelusiveintheextreme.’ Thegreatstrengthofthisbiographyis the way Elson traces how Suharto re -sponded so successfully tothediverse challengesandfrequentlychangingcir -cumstances hehad to faceat different phasesofhislife,gainingincreasedcon -fidence—andeventualhubris—ineach ofthem.Thefivechaptersdealingwith theyearsupto1965areespeciallyillu -minating,whileinthenextfivethevari -ous phasesofhis30yearsaspresident arealldeftlyanalysed.Elson’sinterpre -tationofthecontroversial 1965Gestapu coupandSuharto’shandlingofitseemed
Elson’sbroad and deepknowledge of Indonesia’s earlier socio-economic historyfindsexpressioninhisaptcon -clusion about Suharto’s rule.‘His pe -riodofofficerepresentedprobablythe greatestenduringperiodofgrowthin thecountry’shistory,andbroughthith -ertoonlyimaginedlevelsofprosperity and hope to millions of Indonesians. Moreover,whateverthedamagecaused bycorruption,muchofthatgrowthwas channelledintoproductiveinvestment, into the elaboration of physical infra -structure and communications, into education,familyplanning,andintoag -riculturalandindustrialdevelopment. ...Onthepolitical front,his recordis muchmoremixed…[H]ecreatedalong -livedphaseofpoliticalorderandrela -tivetranquillitysuchasthecountryhad notknownsincethehighdaysofDutch colonialism.Butthatordercameatgreat cost.’
Iwouldhavelikedtoseemoreanaly -sisofwhy(andhow)Suhartodumped ordiminishedhisloyalandlongstand -ingtechnocraticadvisersinthe1990s, quiteharshlyinseveralcases,although notcompletely—andalso ofwhythey
stuck with him for so long despite myriaddisappointmentsand,onesus -pects, moments of deep despair. The storyof‘Suhartoandhisgenerals’was toldbrilliantly byDavidJenkinsnearly 20yearsagoand threw valuablelight onthewaythepresidentestablished his dominanceover themilitaryelite. We nowneedthestoryof‘Suhartoandhis technocrats’ tobetoldmorefully,byan economistwithrealknowledgeofthe way the politic s of economic policy making,patrimonialismand privilege bec am e inc r easingly inter twined throughoutthe30yearsofhisrule.(A usefulinsider’saccountoftheyearsup to1993hasalreadybeengivenbyRa -diusPrawiro[1998],Indonesia’sStruggle forEconomicDevelopment: Pragmatismin Action,OxfordUniversityPress,Kuala Lumpur.Buthewastooclosetotheac -tiontoberegardedasthelastwordon thesubject.)Elsonhasprovidedthees -sentialpoliticalcontext.Butanauthori -tativeeconomicanalysisofthedeeper machinationsisstillneeded.
JamieMackie ANU
While‘TheQuestforGrowth’isanapt title,thesubtitlemaynotevokethesame consensus.PartIofthisbookargueswhy growthmatters,PartIIdocumentsthe manyfailed‘panaceas’,drawingonthe author’s experience as an economist withtheWorldBank,whilePartIIIcon -sidersthealternative intheformofget -tingtheincentivesrightforgrowth.The bookdoesjusticetothefirsttwoparts, leavingthereaderwithasenseofhope -lessness about how growth can be raisedinpoorcountries.
Chapter1startswiththetaleofanex -cursiontoasmallvillageinLahore,Pa -kistan,wherethelackofbasicamenities suchasprimaryeducation,healthcare, electricity,sanitation,foodandshelteris highlighted.Indeedthesedeficienciesare notuncommon:thereaderisbombarded withevidenceofthesufferingofthemil -lionsoftheworld’spoorandtheoppres -siontheyface.Easterlydrawsonseveral studies to makea causal linkbetween growth in nationalincome (GDP) and reductionsinpoverty.
WilliamEasterly (2001),TheElusiveQuestfor Growth:Economists’ Adventuresand MisadventuresintheTropics,MITPress,CambridgeMA,pp.xiii+342.Cloth:US$29.95.
Chapter2considersthemanyfailed attempts to promote growth in poor countries.Harrod,DomarandRostow are(still!)usedtorationalise theuseof aid to meet the ‘financing gap’ for growth‘take-off’incountriesfromAf -rica to LatinAmerica. Chapter 3 uses theSolowmodel(forgettingSwan1956) to highlight the substitutability of labourforcapitalinproduction,noting thatlabour-augumenting technological progresscanbetheonlysourceoflong -run growth.Theauthordismissesevi -denceforconvergenceinincomelevels byattributingtheobservedconvergence to selection bias—‘the winners write economichistory’.
Chapter4dismissesthedogma(wis -dom)ofinvestmentinhumancapitalas the route toprosperity. The schooling– growthnexusisdebunkedwithevidence fromAfricaandAsiashowinganabsence ofstatisticalassociationbetweengrowth inyearsofschoolingandgrowthofper capitaGDP.Theconclusionisthatschool -ing contributes to growth only when incentivesforgrowth,ratherthanredis -tribution, exist; the onuson creation of suchincentivesisclaimedtorestwiththe government. Chapter 5 similarly dis -missespopulation controlasa panacea forprosperity,giventheabsenceofasta -tistical association between population growthandgrowthinpercapitaincome. Itpointsoutthatdevelopmentisbyfarthe mosteffectivepopulationcontrolmeasure, where families increasingly trade off ‘quantityofchildrenfor qualityofchil -dren’, the latter encompassing human capitalinvestment.Chapters6and7turn totheroleandrepeatedfailuresofinter -nationalinstitutionsinraisinggrowthin poorcountries.Aidandadjustmentloans givenwithoutasubsequentgrowthim -pacthaveledtorisingdebtlevelsamong therecipients.Chapter7arguesthatdebt reliefisdoomedtofailgiventhatitrewards irresponsiblegovernance.
Thethirdpartofthebookbeginswith chapter8,aboutincreasingreturnsand particularly thenotion thatreturns to anindividual’sskillarepositively de -pendentontheaverageskilllevelofco -workers. The gap between social and privatereturns,thepresenceofpoverty andwealthtraps(multipleequilibria), andtheeconomicsofagglomeration are explained inaccessible language. Itis proposed that governments subsidise knowledgeaccumulation,fundedpos -siblyvia consumption taxes,to lift an economyoutofapovertytrap.Curiously, the incentives for politicians and bu -reaucrats to engagein such interven -tionsarenotdiscussed.Chapter9draws onSchumpeter’snotionof‘creativede -struction’asbeingfundamental totech -nological progress. The potential for leap-froggingbylaggingnationstothe technological frontier,asrecognisedby Brezisetal.(1993),andtheroleofvested interests in stalling adoption of fresh technologyareusedtohighlightthead -vantageofbackwardness(thatacoun -try can adopt new technology more cheaplyifitlackstheearliertechnology). Given the complementarity between technologyandskills,itisarguedthata criticalmassofbothisrequiredbefore thevirtuouseffectsmaterialise.Whether theequilibrium thatprevailsintheend isapovertyorwealthtrapdepends,ac -cordingtotheauthor,‘onbothluckand governmentpolicy’(p.192).
Chapters 10 and 11 are both hum -blingtotheeconomicpractitioner,the formerarguingthatluckplaysasbiga roleasabilityinachievingprosperity, whilethelatterhighlightsgovernment interventions that extinguish growth. Thepropositionshereareinsharpcon -trasttothoseofLucas(2000),who be -ginswiththeassumptionthattheworld in1800hadapercapitaincomeof$600 in1985prices.Lucasassumesthateach economysubsequentlyjumpedonthe
pathtogrowthinarandomfashion,but with the advantageof backwardness. Thisoverlysimplistic modelis ableto mimicmanyof theobserved realities, includingthelevelofpercapitaincome ofthelead economy,conditional con -vergence,andglobalincomeinequality peakingin1970 but thenpredicted to declinetozeroby2100.Giventhesimi -larityintheassumptionstheymakeon thegrowthprocess,thecontrastincon -clusions between Easterly and Lucas suggeststhatEasterlymaybealittletoo pessimistic onthefutureoftheworld’s poor. Chapter12examines thedebili -tatingeffectsofcorruptiononeconomic growth,whilechapter13discussesop -portunitiespresentedtogovernmentsby divided societies to pursue ‘growth -destroying’ policies. The concluding chapternotesthat‘itisdevilishlydiffi -culttogetincentivesrightforcreating growth’(p.288), and so thequest for growthremainstobefulfilled.
Thisbookmakessoberingreadingfor advocatesofaroleforpolicyingrowth. Itdrawsontheextensive literature on growththeoryanditsapplication,bring -ingthesehomeintheformofthemany
failedexperimentsofthepast60years.It iswrittenin accessiblelanguage,with -out sacrificing theconceptual founda -tions of the grow th literatur e. In summary,thebookisanhonestattempt tohighlightthemanyfailuresindevel -opmentpolicy,drawingonlessonsfrom boththeoryandempiricsonthegrowth process.Perhapsasmatteringofsuccess storiessuchasthoseofBotswana,Ma -laysiaandMauritius,andsomeoptimism fromtheorysuchasthatfoundinLucas (2000),wouldhaveleftthereaderwith lessofasenseofhopelessness aboutthe prospectsoftheverypoor.
SatishChand ANU
References
Brezis,E.S.,P.R.KrugmanandD.Tsiddon (1993), ‘Leapfrogging in International Competition’,AmericanEconomicReview 83(5):1,211–19.
Lucas,R.E.Jr.(2000),‘SomeMacroeconom -icsofthe21stCentury’,JournalofEconomic
Perspectives 14(1):159–68.
Swan,T.(1956),‘EconomicGrowthandCapi -talAccumulation’, Economic Record 32: 334–61.
EvaRiesenhuber(2002),TheInternationalMonetaryFundunderConstraint:Legitimacy of Its Crisis M anagement, Kluwer Law International, The Hague, pp. 440. ²115.00;US$100.00;£70.00.
EvaRiesenhuberhasundertakenacom -prehensiveanalysisoftheroleoftheIMF intheAsiancrisisofthelate1990s.Par -ticularlyvaluableisthein-depthdiscus -sionofthe‘conditionality’governingthe provisionofIMFresources.However,the book’sconclusions—and thus its ulti -mateusefulness—areseriously under -minedbytheauthor’sflawedgraspof thefoundingprinciplesthatgovernIMF lendingoperations.
Amajorthemeofthebookisthatthe IMFdidnothavethelegalmandateun -deritsArticlesofAgreementtoforcethe Asiancountriestoundertakestructural reformsduringtheAsiancrisis.Thisar -gumentisflawed.WhiletheArticlesof Agreementdonotreferspecifically to structuralreforms,theycontainnothing thatprecludestheIMFfromintroduc -ing structural conditionality. In fact, undertheSecondAmendmentenacted
in1978,theIMFcreated theExtended FundFacility(EFF)specifically todeal with casesin which structural distor -tionsweretherootcauseoftheadjust -mentproblem.Provisionsgoverningthe EFFarespelledoutinSelectedDecisions andSelectedDocumentsoftheInternational MonetaryFund(2000:165).Theseprovi -sions specify situations in which an extendedfacilitycouldapply.Theyin -clude:(a)aneconomysufferingserious payments imbalancerelatingto struc -turalmaladjustmentsinproductionand tradewherepricesandcostdistortions havebeenwidespread;and(b)aneco -nomycharacterisedbyslowgrowthand aninherentlyweakbalanceofpayments position which preventspursuit of an activedevelopmentpolicy.Thereisthus nolegalconstrainttotheIMFimposing conditionsonstructuralmeasures.
Itis nevertheless worth considering whetheritsprogramswenttoofarinim -posingstructuralreformsontheAsian crisiscountries.Criticshaveheldthatan excessivefocusofIMFprogramsinAsia onstructuralissuesunderminedmarket confidence, asthesecountrieswerenot inapositiontoimplementsuchreforms intheshortterm.Accordingtothisview, towhichRiesenhuberalsosubscribes,the IMFshouldhavefocusedonmacroeco -nomic issues andstabilised economies by adhering to its mandate ofdealing withmonetary,fiscalandexchangerate polices.
Thereareanumberofproblemswith thisargument.First,therootcauseofthe crisis inAsiawasstructural. Andmar -ketswerefocusingonstructuralreforms asatestofthegovernments’ resolveto dealeffectively withlongstanding eco -nomicdistortions. Nooneexpectedthat theseproblemswoulddisappearover -night,butgovernmentsneededtomake astrongstarttodemonstratecommitment toreformingtheireconomies.Korea,un -dertheleadershipofPresidentKimDae
Jung,wassuccessfulindoingjustthat, with the result that Korea’s financial crisis was contained quickly and the economystabilised. InIndonesia,how -ever,PresidentSoeharto,hisfamilyand the cronies circled the wagons and thwartedthereformeffortsofthetechno -crats. President Soeharto lost on two counts:byagreeingtoIMFconditionshe appearedweakdomestically,andbynot deliveringonreforms,helosttheconfi -denceofthemarkets.
Itis, of course,possible that a sub -stantialinfusionof fundswould have c ontained the financ ial cr isis and stabilised the exchange rate. But the amountrequiredwouldhavebeenun -realistically high. Stanley Fischer, the FirstDeputyManagingDirectorofthe IMF,whowasinvolveddirectlyinthese programs,estimates thatroughly$100 billio n would have been needed to stabilise the situation (see Fischer’s RobbinsLecturepostedatwww.iie.com/ fischer). As Riesenhuber recognises, noneofthecreditorcountrieshadany intentionofdeliveringfundsunderthe second line of defence, in which the major donors made a commitment to provideadditionalresourcestoaugment fundsprovidedbymultilateralinstitu -tions.Itwould,therefore,havebeenun -realistictoexpecttheIMFtostabilisethe situation by a huge infusion of funds intothesecountries.
Tobefair,inthecaseofIndonesia,the IMFdidgetcarriedawayandallowstruc -turalmeasurestoproliferate—apointthat isrecognisedbyFischerinhisRobbins Lecture.Thiswas partlybecausethere was co nsider able pressur e fr om Indonesia’stechnocrats themselvesfor theIMFtoforcethisissue.Ivividlyrecall thatwhenIledtheearlynegotiations in Indonesia senior policy makers were evenkeenerthantheIMFtoinsertcom -mitmentson structural issues intothe Letterof Intent.They sawthisas their
bestchancetoforcePresidentSoeharto toputastoptotherampantcorruption byhisfamilyandhiscronies.Itwasin -conceivablethattheIMFshoulddenythe technocrats theirchanceto forcesome seriousreforms.Alas,Soehartodidnot realisethegravityofthesituation;helet sliptheopportunity toaddresstheseri -ousproblemsundermining theIndone -sianeconomy,andultimatelyfellfrom power.
Thisbookprovidesconsiderablefood forthought. Itis, inthemain, wellre -searchedandwellwritten.Nevertheless, sinceRiesenhuber makessome funda
-mentalerrors inherassessmentof the Fund’slegalmandateduringtheAsian crisis, her conclusions fallshort ofthe markandherbookaddslittletotheim -portantdebateabouttheroleoftheIMF in times of significant economic up -heaval.
BijanAghevli* WashingtonDC
* BijanAghevliwasSeniorDeputyDirec -torfor the Asia–PacificDepartment of theIMFuntilMay1999.Henegotiated th e IMF pr ogr am with Ind on es ia through May 19 98, when President Soehartolostpower.
Yun-PengChuandHalHill(eds)(2001),TheSocialImpactoftheAsianFinancialCrisis, EdwardElgar,Cheltenham,pp.xviii+258.Cloth:£55.00.
Itis now fiveyearssince theThaiau -thoritieswereforcedtofloat thebaht, triggeringwhatrapidlybecameknown inthemediaandacademiccirclesasthe Asiancrisis.Arguablynosingleevent, economicor political, has had a more dramaticimpactontheSoutheastAsian economiesasagroupsincetheending oftheVietnamconflictin1975.Thecri -sis and the growth collapses that fol -lowedin1998haveforcedmanyinthe region and beyond to re-evaluate the idea of ‘East Asian exceptionalism’ propagatedbyanumberofpublications in the decadefrom 1986 to 1996. The most celebrated was the 1993 ‘Asian Miracle’reportof theWorld Bank;in -deeduntilJuly1997boththeBankand othermultilateralandbilateraldonors, aswellasmanyacademics,keptupa steady flow of publications stressing thatrapideconomicgrowthwaslikely to continuein muchof Asia wellinto thenewcentury.Wenowknowbetter; indeed some whopuffed up thefast -growingASEANeconomiesinthe1980s
and 1990sare now writing theregion offasabasketcase.Insteadofcompari -sons with Japan, Taiwan and South Korea, we are now hearing that the ASEANregionmayhavemoreincom -mon with Latin America, that future growthratesmaybebothlowerandfar more erratic, and that financial crises maybe arecurringfeatureof theeco -nomiclandscapefordecadestocome.
To aconsiderable extent,such judg -mentsreflectthefactthatmanyeconomic commentatorsin thepress, inbanking andfinance,andingovernmentandin -ternationalagencieshavenothadalong -termengagementwiththeeconomiesof theregion,andhave,atbest,onlyaslen -dergraspoftheirevolutionoveraperiod ofdecadesratherthanmonthsoryears. Abook examiningthesocialimpact of theAsiancrisiswrittenbyagroupofaca -demicswho,withoneexception,come fromAsia,andwhoallhavebeenstudy -ingtheregionforseveraldecades,isthus to be welcomed.In their introductory chapter,theeditorssetoutreasonswhy
the Asian crisis should not just be viewed as apassing ‘blip’ in thelong -runtrendofgrowth.First,theextentof thegrowthcollapseintheworstaffected economies wassevere,andindeedun -precedented inrecenttimes.Second,the crisishasleftinitswakemajorproblems in the corporate and financial sectors, andresolvingthemisprovingpainfully slow.Theeditorsrightlystressthatmuch of the crisis remains unexplained, al -thoughitisclearthatbothitscausesand itsconsequences havevariedgreatlyby country.
The six casestudies(Thailand, Ma -laysia,Indonesia,thePhilippines, Tai -wan and So uth Ko rea) all co ntain analysesoftheeventsleadinguptothe crisis, and of its social impacts. In discussingtheperiod beforetheflota -tionofthebahtandthesubsequent‘con -tagion’ in neighbouring economies, Krongkaew presents a fullaccountof thefactorsthatcausedtheBankofThai -landseriouslytounderestimatetheprob -lemsinboththefinancialsectorandthe realeconomy.Itmadea‘graveerror’in predictingstrong export expansion in 1997,andturnedablindeyetothecon -sequences for capital inflows of tight domesticmonetarypolicyunderwhat wasperceivedtobea‘hardpeg’tothe dollar.Krongkaewnotesthefailureof thetechnocrats withintheBankofThai -landtointeractwiththoseinuniversi -ties and in otherparts of government whowerepredictingtrouble.Inanalys -ingthereasonsforthecontagiontoMa -laysia,Sharilistsanumberof‘emerging concerns’ that affected investor confi -dence,includingaslowdowninexport growth,andexcessivecreditexpansion. InbothMalaysiaandIndonesia,and to a lesser extent in the Philippines, Thailand’sproblemscertainlyservedas a‘wake-upcall’toinvestorstoscrutin -iserecenttrendsintheseeconomiesmore carefully.Inthelastpartof1997theybe
-cameincreasingly alarmedatwhatthey saw. In Indonesia, where at first most commentators thoughtthat‘strongfun -damentals’wouldpreventseriouscon -tagion from Thailand, the Soeharto regime proved incapable of restoring confidenceinthelastmonthsof1997.Hill givesabriefaccountofeventsleadingto thecollapseoftherupiahandSoeharto’s resignation inMay1998.Ashebecame moreillandisolated,Soehartoconsulted noonebeyondanarrowcircleoffamily membersandcronies.Notonlyforeign investorsbutmanyIndonesiansdecided thattheonlywaytopreservethevalueof theirsavingswas toconverttheminto foreigncurrency.ManyMalaysianswere drawingthesame conclusionfromthe behaviouroftheirgovernment.InMalay -siatheensuingcapitalflightwashalted onlyafterthe controversial decision to pegtheringgitandcontrolcapitalflows inSeptember1998.
Theeffectsofthecrisisonlivingstan -dardsinThailandandIndonesiawere cushionedtosomeextentbythefactthat theimmediateimpactofthe1998growth collapsewasoninvestmentexpenditures ratherthanconsumption expenditures. Althoughprivateconsumptiondidde -cline and poverty increased in both economies, the problems were not as catastrophic as some predicted. The devaluation didofcourseleadtoanin -crease in nominal incomes for small -holderexportproducers,andonbalance ruralareas in most parts ofAsia were lessbadlyaffectedthan thetownsand cities. Balisacan and Edillon’s analysis oftheeffectsofthecrisisonhouseholds inthe Philippines suggeststhat many had toadjustbyeating lessexpensive food,increasinghoursofworkandtak -ing children out of school, and that, otherthingsbeingequal,womenwork -erssufferedmoreunemploymentthan men.Onesuspectsthatthiswouldalso betrueinotherpartsofAsia.
Whateffects will thecrisis haveon thelonger-term behaviour of govern -mentsinAsia?Mostoftheauthorsdis -cuss the various ‘social safety net’ programs implemented, usually with mixedsuccess,inthewakeofthecrisis. Inseveraleconomiesitappearsthatgov -ernmentinitiatives were aimed atthe morepolitically sensitivegroupsinur -banareas,ratherthanatthereallypoor. Inthelongerrun,inThailand,Indone -siaandthePhilippines, theproblemof howgovernments mightassistthemost marginalisedhouseholds,especiallyin rural areas, will persist well after the immediate consequences of the crisis andthegrowthcollapseareover.Atthe internationallevel, Yun-peng Chu ar -guesfortheestablishmentofanAsian
Monetary Fund, which ‘should assist thetroubledeconomiesintheirrevitali -sation,andinstallanearly-warningsys -temtodetectfinancialrisks’.Asceptical readermightquestionwhetheranAMF wouldbeanymoresuccessfulthanthe IMFinpreventingfinancialcrisesfrom emerging again in Asia. Perhaps, as RaymondGoldsmithargued,theyarea childhood disease of capitalism for whichwehavenotyetfoundavaccina -tion.Atbest,policymakersinAsiacan learnfrom theevents of1997–98, and treat the afflicted economies more quicklyandeffectivelywhenthedisease nextstrikes.
AnneBooth SOAS,UniversityofLondon
MarcelP.Timmer(2001),TheDynamicsofAsianManufacturing: AComparative Per
-spectiveintheLateTwentiethCentury,EdwardElgar,Cheltenham, pp.328.£59.95; US$95.00.
Economists have produced numerous studiesoftheproductivity performance of Asian developing economies in the 1990s.Theimpetusforthesewasthede -bateoverwhethereconomicdevelopment inAsiawasduesimplytocapitalaccu -mulationortobothcapitalaccumulation andproductivity growth. The pointof thisdebatewasthattherapideconomic growthenjoyedbymostAsianeconomies would not be sustainable without im -provementsinproductivitygrowth.
MarcelTimmer’s book, theresult of PhD research undertakenat the Eind -hovenUniversityofTechnology, isare -cent contribution to this literature. It presentsacomparative analysisofpro -ductivityperformanceinfiveAsiancoun -tries: China, Indonesia, South Korea, IndiaandTaiwan.Thestudymeasures
andexplainscomparative productivity levelsandgrowthwithinthemanufac -turingindustriesfortheperiod1963to 1993.Itdiffersfromearlierstudiesinthat itfocusesnotonlyonproductivitygrowth butalsoonrelativelevelsofproductivity across countries. The advantage of Timmer’sapproachisthatitpermitsan assessmentoftheproductivity gapbe -tween countries, and whetherthegap hasnarrowedovertime(i.e.the‘catch -up’ process), thus providing a richer analysisoftheindustrialisationprocess. Chapter1(theintroduction)andchap -ter 2 (on the catch-uphypothesis) are short, essentially setting the stage for whatfollows.Thenextfourchaptersare thecoreofthebook,andfocusonmea -surementandbenchmarking ofrelative productivity measuresacrosscountries.
Chapters3and4presentasoundmeth -odologyforinternationalcomparisonof productivity levels. Theauthoris well aware of the conceptualdifficulties in comparing levelsacrosscountries,and overcomesthesebybenchmarking pro -ductivity levels with those in the US. Chapter5comparesaggregateproduc -tivityacrosscountries,identifyingperi -odsofrapidcatch-up(relativetotheUS) and stagnation, while chapter 6 com -paresproductivitylevelsofsubsectorsof manufacturing acrosscountries.Chap -ter7considerswhetherindustrystruc -ture affects productivity levels, and chapter8reviews,inlightofthestudy’s findings,thedebateonthelinkbetween approachestoindustrialpolicyandpro -ductivitycatch-up.Allchaptersareofan easilydigestiblelength,butsomeparts arequitetechnicalandnoteasilyacces -sibletonon-economists.
Several interesting findingsdeserve special mention.First, the study finds thatincreasesinproductivity levelsare animportantpartofthegrowthprocess evenintheearlystagesofindustrialisa -tion,andthisgrowthisgenerallybroad -based. Second, the productivity gap betweentheEastAsiancountriesandthe UShasnarrowedconsiderablyovertime, butwasstilllargein1993.Forexample, Timmerestimatesthatby1993Korea’s productivity levelwasstilllessthanhalf thatoftheUS.The productivity gapis evenlargerforIndia,ChinaandIndone -sia.Forexample,valueaddedperworker inChinaandIndonesiawasonlyaround 5%ofthatinUSmanufacturing in1993, although there is significant variation across sectors within each country. A third findingisthatthelabourproduc -tivitygapwasduepartlytodifferences incapitalintensityacrosscountries,but primarily to differences intotal factor productivity(TFP)growth.Accordingto Timmer,Indonesia’sTFPlevelwasonly
about18%oftheUSlevelin1993.Onthe basis of these results the author con -cludesthatIndonesiaandtheotherfour Asian economiesstill have significant roomforproductivity catch-upwiththe US.
Oneweaknessof thebook is that it doesnotdealadequatelywiththelink between the different countries’ ap -proachesto industrialpolicy andtheir catch-upinproductivity. Thisofcourse remains a relevant policy issue today. TheauthordoesnotethatforKoreaand Taiwan(twocountriesthathadamore ‘interventionist’ industrialpolicy than theothers),thetargetedsectorsdidnot performanybetterinproductivityterms thanthenon-targetedsectors.Hecon -cludesthatwhileselectivepoliciessuch as cheap credit may have stimulated rapid resource accumulation, general policy orientation—giving priority to macroeconomic stability, openness to trade,andprovisionofinfrastructureand generaleducation—playedadominant roleinthebroad-basedproductivity im -provementsofthesetwocountries.Inthis regard,aneconometric approachsepa -rating the structuralvariables and the various policyvariables—tradepolicy, subsidies,R&Dincentivesandexpendi -ture on education—would have pro -vided a rich insight into why some countries experienced fastercatch-up thanothers.
Insum,thisisacomprehensive and technicallysoundstudyofproductivity levelsandgrowthinfiveimportantAsian countries.While parts of the book are technicalandmaynotbeveryaccessible togeneralreaders,itwillbeanimpor -tantreferenceforuniversitycourseson theeconomicsofdevelopment.
KellyBird PartnershipforEconomicGrowth (USAID/Bappenas)/ANU
J.SoedradjadDjiwandono(2001),MengelolaBankIndonesiadalamMasaKrisis[Man -agingBankIndonesiaduringtheEconomicCrisis],LP3ES,Jakarta,pp.xiii+398.
J.SoedradjadDjiwandono(2001),BergulatdenganKrisisdanPemulihanEkonomiIndo
-nesia[StrugglingwithEconomicCrisisandRecoveryinIndonesia],SinarHarapan, Jakarta,pp.xii+321.
had beenbefore, whileothers argued thatalargedepreciationmustmeanthat Indonesia’s economic fundamentals weremuchlesssoundthanwasgener -allybelieved.Bothpositionsidentified themajorinstitutionalproblemofpoor governanceorKKN(‘corruption,collu -sionand nepotism’) as thekey to the crisis.Djiwandonoarguesthattheeco -nomic fundamentals were relatively strong,butthatIndonesiahadamajor problem in the banking system; the sourceofthecrisiswasamixtureofin -ternalfactors, includingaweakbank -ingsystem,andexternalfactorssuchas the financial panic in Thailand. This argumentseemssound,giventhatthere is noclearlink betweenthe crisis and economic fundamentals such as GDP growth,inflation and totalfactor pro -ductivity.Theeconomiccrisisof1997– 98 was mainly to do with financial markets,exchangerates,theproblemof short-term debt, capital mobility and politicaldisturbances.Inaddition,the uniq ue eq uilibr ium Kr ugman-type modelcannotbesaidtoapplyinEast Asiancountries otherthanThailand. Djiwandonoalsopointsoutcorrectly thattheeconomiccrisiscannotentirely beexplainedbyKKN.Ifthiswerethe trigger,whydidittakeuntilJuly1997 forthe economyto beginto unravel, andwhydidChinaorVietnam,which wereas corruptasIndonesia, escape thecrisis?
Thebooktellsthestorybehindtheclos -ingof 16 banksinNovember 1997,an actionthatprovokeda showerofcriti -cism.Contrarytothepopularargument Since1997Indonesiahasbeenmiredin
economiccrisis, andourfortuneshave risenorfalleninconcertwiththerupiah. It has been a long wait, and we are hauntedby twoquestions—when will webegintoemergefromthiscrisis,and wherewilltherealsignsofeconomicre -covery appear? It might be useful to understandwhathashappened,particu -larly inside Indonesia’s central bank, duringtheselongyearsofgloom.Two booksbySoedradjadDjiwandono,former governorofthecentralbank,areimpor -tantsourcesforthispurpose.
Itwouldbenosurpriseifthefirstbook wereconsideredadefenceofSoedradjad Djiwandono. It contains his personal accountofdebatesonvariousmatters, rangingfromthesourcesofthecrisisto tightmoneypolicy,thepermanentclo -sureof16banksinNovember1997,Bank Indonesia liq uidity support (BLBI, Bantuan Likwiditas Bank Indonesia) and otherissues related to therole of BankIndonesiafromJuly1997toFeb -ruary1998.Intheintroduction, Djiwan -donoadmits thatthebookisfarfrom comprehensiveandthatheseesitasa personalaccountratherthanarigorous academicstudy.Nevertheless, itismost usefulas asupplementto thevarious investigationsofthecrisisinIndonesia. The author discusses what really wentoninBankIndonesiaduringthe economiccrisisandwhatthesourcesof thecrisis were. Heoutlinesthe initial debate,centredonthelinkbetweencur -rencydepreciation andeconomicfun -damentals.Oneviewsuggestedthatthe economywas basically assound as it
thatthedisastrouseffectsoftheclosures wereduetotheabsenceofdepositinsur -ance,Djiwandonoarguesthattheresult -ing bank runs were created by large depositors.Inotherwords,evenifdeposit insuranceforsmalldepositorshadbeen inplace,thiswouldnothaveprevented bankruns.Learningfromthisfailurethe IMF,withtheblessingoftheIndonesian government, subsequently provided a blanketdepositguarantee.Itisclearthat theIMFdidnotexpectbankrunstore -sult from the closures: asDjiwandono points out,theFundkeptarguingthat the value of the 16 banksrepresented only3%ofthetotalassetsinthebanking system,andthereforetheclosureswould notaffecttheeconomyadversely.Unfor -tunately,history hasshownotherwise: theclosures led tobankrunstowhich thecentralbankrespondedbyprovid -ingliquiditycreditsupport(BLBI).Itis unfortunate thatDjiwandonodoesnot explaininmoredetailtowhatextentthe bankrunsweremotivatedbyfearofthe collapseofbanksandthelossofdepos -its,andtowhatextentbyadesiretobuy foreign currency and speculateon the rupiah.Sincebothmotivesarelikelyto havebeenpresent,theprovisionofBLBI, intendedtopreventbanksfromcollaps -ing,was(withoutsterilisation)infactalso financingspeculation againstrupiah.
Anotherinteresting story inthevol -ume concernsinterestratesduringthe crisis. Djiwandono recountsthat Bank Indonesiawasunderpressuretoreduce liquidityandinterestrates,andthatother ministers from ‘the real sector’, and Soeharto,wereinfavourofreducingin -terestrates.Headmitsthatatthetimea highinterestratewouldonlyhavebeen effectiveindefendingtherupiahinthe shortterm.Buthedisagreedwiththede -cision of Mar’ie Muhammad (former MinisterofFinance)toconvertdeposits owned bystate-ownedcompaniesinto SBI(BankIndonesiaCertificates), andto
stoproutineexpenditure fortwoweeks becauseithadraisedtheinterbankinter -estratebymorethan100%.
Althoughthisisapersonalratherthan anacademicaccountoftheroleofBank Indonesiaduringtheeconomiccrisis,it offers many useful insights into the bank’srole,andintothestorybehindthe author’sdismissalfromitsgovernorship, aneventheconsidersagreatpersonal relief.
The second book is a selection of Djiwandono’sarticlesandpapersinthe mediaandinseminars.Likethefirst,it discusses a wide range of issues that bearontherelationship betweenthecri -sis and KKN, the exchange rate and BankIndonesia.Itisinteresting toread Djiwandono’s response to the argu -ments advanced by Steve Hanke,the Johns Hopkins University adacemic whopromotedtotheIndonesianlead -ershiptheideaofaCurrencyBoardSys -tem (CBS). Djiwandono argues that foreignreserveswereinadequatetosup -portaCBS,andthatthelackofalegal frameworkandthetendencyofthegov -ernmenttointerveneinmonetarypolicy wouldmakeaCBSineffective. Thisde -bateisfascinating, particularly ifwere -lateittocurrentperspectives ontheCBS inrelationtotheeconomiccrisisinAr -gentina. As Paul Krugman argues, Argentina’scurrency boardallows no flexibilityinmonetarypolicy,makingit difficultforpolicymakerstorespondto thecrisis.WasitablessingthatIndone -siadidnotadoptaCBS?Itremainsabig question.
Evenmoreinterestingistheuntoldpo -litical economy story behindthe CBS. Djiwando no wonder s how Steve Hanke’snamecameintothepictureand whyhecametoIndonesiaattheexpense ofPTAstraInternational andunderthe nameofSimonHolland.Ashesays,itis likeadetectivestory(p.79).Ofcourseit is dangerously heroic toconclude that
theplantoadoptaCBSwassolelydriven bypoliticalfactors.However,inIndone -sia,wherepoliticalfactorsaresoimpor -tantineconomicdecision making,this questionremainsofinterest.Djiwandono alsorecountshowhehad tousepolite argument,speakingwithSoehartoina ‘Javaneseway’,tovoicehisopposition totheCBSidea,whichthepresidentsup -ported. He explains his disagreement withtheideaintermsnotofthelimita -tionsoftheCBSsystem,butmerelyofthe conditionsthegovernmentwouldhave tomeetbeforeadoptingtheCBS.Hebe -lievedthataCBScouldonlybeeffective
under the right circumstances, which were not present when the idea was raised.
Althoughnotprovidingacomprehen -sivediscussionoftheeconomiccrisisin Indonesia,thesetwobooksareusefulin enrichingourunderstanding ofit.Some of the topics covered, including tight moneypolicy,BLBIandtheCBS,arein -deedstillsubjectsofdebate.Perhapsthese bookswillstimulatefurtherresearchon them.
M.ChatibBasri UniversityofIndonesia
