Manajemen | Fakultas Ekonomi Universitas Maritim Raja Ali Haji 0007491042000205231
Bulletin of Indonesian Economic Studies
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Book reviews
To cite this article: (2004) Book reviews , Bulletin of Indonesian Economic Studies, 40:1,
117-133
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Page 117
Bulletin of Indonesian Economic Studies, Vol. 40, No. 1, 2004: 117–33
Taylor & Francis Group
BOOK REVIEWS
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Lloyd Kenward (2002), From the Trenches: The First Year of Indonesia’s Crisis of
1997/98 as Seen from The World Bank’s Office in Jakarta, Centre for Strategic and
International Studies, Jakarta, pp. 150. US$25.00 + US$10.00 airmail postage.
The first 100 pages of Lloyd Kenward’s book were written in late 1998 and provide a clear and lively account of Indonesia’s economic crisis up to that point. In
the final 30 pages he tries to draw lessons and explain why things went so wrong.
An epilogue of just over one page brings the story up to September 1999.
Kenward’s survey of events covers a lot of the same ground covered by the
surveys written for BIES, but he has two advantages over the BIES survey writers: having been an official working in the World Bank office in Jakarta during the
crisis allows him to write partly as an insider, and by covering a whole year he
can follow developments in particular areas in a more coherent way than is possible in a series of surveys covering just four months each. Indeed, it is a pity that
the book does not cover a still longer period, since there is no obvious logic for
the late 1998 and late 1999 finishing points. Perhaps they were imposed by
changes in where Kenward happened to be working. I found the assignment of
crucial parts of the account to footnotes and boxes irritating because it interrupts
the flow of the main text. Another minor defect is that there is no index.
While the survey of events admirably fulfils the title’s promise of a soldier’s
view from the trenches, the last chapter, which deals with the big questions of
how the generals should have conducted the war, is much more open to criticism.
Obvious questions for a book on Indonesia’s crisis are: What did the government
do wrong? What advice should the IMF and the World Bank have given? If the
best advice had been given and followed, would things have been much different? It is obviously very hard to give confident answers to such questions. My
own view is that Indonesia’s crucial policy mistakes were Bank Indonesia’s failure to commit itself to credible and restrained monetary growth and the government’s failure to make the new bankruptcy legislation effective. The former
failure justified investors’ loss of confidence in the value of the rupiah; the latter
failure left insolvent firms in a limbo in which their original owners retained the
assets but were unable to obtain the working capital needed to use these assets
productively. Soeharto’s illness, anti-Chinese riots and the government’s public
brawl with the IMF over its failure to implement the agreed package obviously
hurt too.
Kenward mentions the lack of progress on bankruptcy reform, criticises the
excessive amount of unsterilised liquidity support poured into the banking system around the end of 1997 (p. 121) and praises the increase in interest rates at the
end of March 1998 (p. 83). However, these policy failures do not receive anything
like the prominence that he gives to the government’s lack of commitment to the
ISSN 0007-4918 print/ISSN 1472-7234 online/04/010117-17
DOI: 10.1080/0007491042000205231
© 2004 Indonesia Project ANU
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microeconomic reforms recommended by the Bank and the IMF. Kenward sees
this lack of commitment as having been the government’s most serious policy
mistake. He views microeconomic reform not just as a way of eliminating various
microeconomic inefficiencies, but also as a partial solution to the financial crisis.
He argues that the government’s lack of commitment to these reforms meant that
too much weight had to be put on monetary and fiscal contraction in an attempt
to restore investor confidence.
An opposite view to Kenward’s on the significance of microeconomic reform
is that of Paul Volcker, the former Chairman of the US Federal Reserve. At the
suggestion of Lee Kuan Yew, Volcker was invited by Soeharto to visit Jakarta in
January 1998 to comment on the IMF package. He poked fun at its ‘recipe section’—that is, the microeconomic reforms to the markets for cloves, oranges,
cashews, vanilla, soy beans, dairy products, cooking oil, sugar, wheat and wheat
flour. Kenward deals with this major objection to his main thesis in a footnote. He
notes that Volcker ‘couldn’t see what lifting these monopolies had to do with
financial stabilization’ (p. 45), but he does not flag the fact that Volcker’s seemingly reasonable scepticism, if correct, contradicts his own thesis that far reaching
microeconomic reform was the way out of the financial crisis.
My guess is that Volcker was right and Kenward wrong. In normal times, the
World Bank and the IMF are right, in my view, to recommend microeconomic
reforms that would probably raise national income by eliminating what neoclassical text books refer to as ‘triangles of deadweight loss’. In normal times, the
government of a developing country can accept the recommendations that suit it
and reject the rest—just as the governments of industrialised countries often act
in ways far removed from what Adam Smith or Milton Friedman might recommend. However, in my view, the only microeconomic reforms that are relevant to
restoring confidence in the currency and the financial system are things, like
bankruptcy reform and prudential regulation, that relate directly to the efficient
functioning of the financial system. On this view, the ‘recipe section’ of the IMF
package for Indonesia was a rather arrogant irrelevance on the part of the staffs
of the IMF and World Bank. The crisis had nothing to do with agricultural and
manufacturing monopolies, but provided the international institutions with an
opportunity to force the government to speed up its acceptance of the text book
policies that they had been pushing with only limited success for many years. It
is one thing to think that free trade and open competition are generally beneficial,
and quite another to force these policies on a sovereign government that does not
wish to adopt them, but is desperately anxious to obtain outside financial assistance
Regardless of whose view of microeconomic reform is correct, it is surprising
and seemingly inconsistent of Kenward to heap criticism on the government for
backsliding on the reforms to which it was committed under the various agreements with the IMF, and also to criticise Soeharto for being too prompt in reducing the subsidies to food and fuel. When discussing the riots that finally toppled
Soeharto and that were sparked by the partial removal of these subsidies in April
1998, Kenward notes that although the 50% rise in fuel prices was in line with the
World Bank’s recommendations, the implementation of this policy in April 1998
was well ahead of the World Bank’s July 1998 deadline. He adds: ‘To their great
credit, the IMF and a number of ministers advised against such harsh action
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(p. 95)’. Quite why delay on other microeconomic reforms was disastrous, but
delaying subsidy removal from April to July 1998 would have been desirable, is
not explained.
The above criticisms of Kenward’s analysis of the role of non-financial microeconomic reforms do not detract from the book’s chief merit, which is to provide
an excellent account of what happened, and when, during the first year of Indonesia’s economic crisis. All BIES readers would benefit from reading it.
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George Fane
ANU
Dani Rodrik (ed.) (2003), In Search of Prosperity: Analytic Narratives on Economic
Growth, Princeton University Press, Princeton, pp. 481 + vi. Paper: $32.50;
£21.95; Cloth: $59.50; £39.95.
Joseph Stiglitz (2002), Globalization and Its Discontents, Allen Lane The Penguin
Press, London, pp. 282 + xxii. Paper: A$24.95; US$15.95; Cloth: US$24.95.
These two volumes, one focused on growth and the other on crises, are edited
and authored respectively by two of the world’s most eminent economists. They
will probably set the intellectual agenda for thinking about issues of economic
development in the global economy for some time to come. Indonesia is not central to either volume: it is covered in one of 14 chapters in the Rodrik volume, and
it receives scattered attention in Stiglitz. However, both volumes contain much of
analytical and policy relevance for the country, which enters the story in the context of both growth and crisis episodes. The purpose of this review is to summarise the insights on Indonesia, and to draw out some general lessons from the
discussion.
The major appeal of the Rodrik volume is that it presents a series of excellent
country case studies cast in a rigorous analytical framework. An eclectic group of
countries is included—six Asian (India receives two chapters), two each from
Eastern Europe and Africa, three from Latin America, and one high-income economy (Australia). Their growth outcomes vary enormously: high-growth China
and the two African stars (Botswana and Mauritius), perennial under-performers
like Pakistan and Bolivia, and the three Southeast Asian economies to have experienced major reversals in their fortunes in the last 20 years, one positive (Vietnam), the others negative (Indonesia and the Philippines).
A novel feature of the volume is that these are not country case studies in the
traditional sense of providing a general review of socio-economic development.
Rather, they (and their authors) are selected to shed light on key analytical questions and debates in the development economics literature. As the editor
explains, in the field of economic growth, there has been a rapid expansion of
cross-country econometrics. But there is always the lurking suspicion that ‘econometrics can be used to prove anything’, and thus it is useful to expose this crosscountry work to the reality check of country case studies and, equally important,
vice versa. Moreover, the book is motivated by the ‘serious gaps in the existing
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research’ on the factors determining economic growth, and why some countries
appear better able to adopt the ‘right’ policies. The resultant ‘analytical country
narratives’, not necessarily written by country specialists, are guided by the well
established growth literature, together with emerging political economy formulations, particularly as they shape institutional quality. This volume is in the tradition of high quality country studies such as the Bhagwati–Krueger NBER trade
and development series of 20 years ago and the Little et al. World Bank macro
series of the early 1990s (though neither series perhaps receives the recognition it
might have in the volume under review).
Rodrik’s stimulating introduction lays out the research agenda, based on his
threefold taxonomy of growth determinants: geography, integration (trade) and
institutions. Drawing on the contributions to this volume, together with his own
extensive writings, he highlights six principal conclusions. The connecting theme
is that the quality of institutions is central to an understanding of growth outcomes. These institutions need to be developed on the basis of local conditions,
and sometimes involve experimental adaptation. Reassuringly, though, the onset
of economic growth does not appear to require deep institutional reform, as illustrated by both the Chinese and Indonesian experiences. Aside from institutions,
Rodrik argues that both geography and trade policy are less important factors
than is commonly asserted. The first of these arguments is now increasingly in
the mainstream. But the second still belongs firmly in the ‘heterodox’ camp, and
receives at best mixed support from the subsequent country studies.
In passing, since institutions are so central to the volume, one wonders
whether perhaps it might have also included a ‘state of the art’ survey of the literature on this subject, assessing definitions, empirical proxies (the latter in particular in the context of the feasibility of long-term growth econometrics), and
causal channels. Presumably it is possible to have ‘good’ institutions but poor
economic policies and low growth. The highly interventionist development
strategies of India and Fiji for much of their post-colonial histories readily come
to mind. Moreover, it may well be that openness to the global economy exerts an
independent discipline on institutional quality, and mitigates the possibility of
deterioration. Such an argument appears plausible in the case of Malaysia, for
example.
Jonathan Temple’s provocatively but aptly titled chapter, ‘Growing into Trouble: Indonesia after 1966’, synthesises Indonesia’s development experience over
the last third of the 20th century. BIES readers will find little that is new in his
description of events. Rather, the principal analytical attraction is how a major
international authority in the growth literature tackles the subject. That is, how
might growth theory be employed to shed light on Indonesia’s development outcomes?
A key argument of this excellent and thoughtful chapter, and a view now
widely accepted in Jakarta, is that the Soeharto regime did not use the opportunity of 30 years of rapid economic growth to build stronger institutional structures, able to withstand both leadership transitions and economic crises. Hence
its achievements were always ‘precarious’. Dipping into the economic growth
and political economy literatures (including, reassuringly, articles from BIES),
Temple notes the conventional explanations for high growth, especially good policy (mainly macro stabilisation) and good luck (including the green revolution
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and the oil boom in the 1970s, and strong East Asian growth throughout). He also
draws attention to the fact that Indonesia avoided a good deal of the ‘predatory
state’ phenomenon common in resource-rich countries with weak institutions.
Like everybody else working on Indonesia, Temple struggles somewhat in the
search for a coherent explanation of the country’s abrupt reversal of fortunes in
1997–98. He is attracted to the Olsonian notion that rapid growth can be a destabilising force, and also to the Dani Rodrik view that exogenous shocks are more
difficult to manage in countries with latent social conflict and weak institutions
for handling conflict.
These arguments do have intuitive appeal. The question is: How far do they
get us? Perhaps Indonesia’s growth was ‘unbalanced, … unevenly spread among
regions and ethnic groups’ (p. 175). The data do not really support these assertions, though: inter-regional inequality (as measured by average provincial
household expenditure) remained remarkably stable from the early 1970s, when
such data were first released, and I am unaware of any reliable and detailed data
on income by ethnic group (certainly none disaggregated into pribumi and nonpribumi categories). Yet Temple is surely correct if he is referring to widely held
perceptions of distributional impact. Moreover, Temple could reply that the
apparently successful regional story has been complicated by socially disruptive
large-scale migrations, some officially sponsored.
More generally, these important speculative forays need to be assessed also for
their explanatory power during other Soeharto-era crises. The most important
was during the mid 1980s, when international oil prices collapsed and Indonesia
could well have followed Mexico into deep economic crisis. Yet, as Temple effectively documents, Indonesia pulled through this period adroitly and growth was
quickly restored. Thus, the destabilising effects of a combination of growth, latent
social conflict and weak institutions were certainly not insurmountable problems
then. An obvious rejoinder to this commentary is that by 1997 Indonesia had
changed significantly, and in such a way that it had to develop higher quality
institutions. Soeharto was inevitably approaching the end of his long rule. Moreover, having opened up its financial sector in the late 1980s, in the 1990s world of
rapidly increasing and volatile global capital flows the country needed much
higher standards of financial regulation, more sophisticated exchange rate management, and much else. In sum, Jonathan Temple’s chapter is undoubtedly one
of the most important written on Indonesian economic development, and it will
be of great interest to country specialists and general development economists
alike.
There is a great deal else of interest in this volume, beyond the scope of this
review. There are the puzzles of other kinds of ‘growth collapses’ (e.g. Venezuela)
and also the two successful ‘African exceptions’, Botswana and Mauritius (the
former at least a success before the advent of HIV–AIDS). For Pakistan, William
Easterly sees the issue as ‘growth without development’, in the sense that large
groups of the community are excluded from what has been in aggregate a moderately respectable economic record.
In a rich and nuanced chapter comparing the Philippines and Vietnam, Lant
Pritchett rightly emphasises that growth recipes and therefore policy advice vary
greatly, depending on a country’s economic and institutional circumstances. On
the Philippine record, of much relevance to post-Soeharto Indonesia, he confronts
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the conundrum that, post-Marcos, the country (which is ignominiously labelled
a ‘Democratic Dud’!) has broadly met many of the political requirements of the
so-called ‘Washington consensus’. These include a free press, open and reasonably fair elections and an active and vibrant civil society, including a plethora of
NGOs and think tanks, not to mention good and reasonably broad-based human
capital indicators. It has also opened up its economy, while fiscal policy has generally been (just) adequate. Yet its economic performance has been frustratingly
poor, with current per capita income similar to that of the early 1980s. Pritchett’s
conclusion, that the post-Marcos political economy arrangements have actually
increased ‘institutional uncertainty’, is largely untested and does not connect
much to his earlier theoretical reasoning. But it is a proposition this reviewer
finds very appealing.
In sum, this absorbing volume takes country economic studies to a new analytical plane, and is essential reading for anybody interested in modern development economics. An understanding of a country’s economic performance ideally
requires both the immersion experience of country experts and the interpretive,
analytical skills of growth theorists. Often, these two literatures sit uncomfortably
beside each other, but hardly communicate. This book demonstrates nicely how
the two can be productively integrated.
Turning to the Stiglitz volume, it is difficult to know what to add to the debate
that has raged over arguably the most famous and widely read economics book
in recent years. The central tenets of this volume are well known, and need not
be repeated here in any detail. The IMF, and behind it the US Treasury and ‘Wall
Street’, are alleged to have grossly mismanaged developing countries’ engagement with the global economy, especially among transitional economies and
those experiencing sudden crises. Countries are forced to open their capital
accounts and liberalise their financial sectors prematurely (e.g. p. 129: ‘The IMF
told countries in Asia to open up their markets to hot short-term capital’). An ideologically driven, ‘one-size-fits-all’ policy framework is forced upon countries
seeking IMF support. No alternatives are placed on the policy agenda. Reports
are practically written from Washington DC prior to field missions. Policy conditionality is rigid and excessively intrusive. Fiscal prudence is elevated above
social concerns. Economic policy advice and conditionality are callously dispensed from luxury hotels.
Indonesia’s 1997–98 crisis is central to Stiglitz’s attack on the IMF, though the
country enters centre stage only briefly, on several occasions. According to
Stiglitz, the Fund dictated policy to the government of ‘Mohammed Suharto’ as
in the other crisis-affected economies. ‘Capital account liberalization was the single most important factor leading to the crisis’ (p. 99, italics in original). The IMF was
partly responsible for the onset of the crisis, he argues, and it exacerbated the
downturn. Its reform program was analogous to ‘crying fire in a crowded theater’. Tightened fiscal policy and the sudden bank closures of November 1997 are
central to the critique as it relates to Indonesia. The process was politically mismanaged, too, especially following the January 1998 photograph of the IMF Managing Director ‘… standing with a stern face and crossed arms over the seated
and humiliated president of Indonesia’ (p. 41). Social conditions were unnecessarily aggravated (the volume includes the contentious assertion that Indonesia’s
unemployment rate rose tenfold, p. 97).
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This is a polemical treatise by one of the greatest economists of our times. The
passion, conviction and anger of the 2001 Economics Nobel Laureate permeate
every page. And we do need to worry, deeply, about the issues raised. Externally
dictated policy mistakes that condemn countries to underdevelopment and
poverty deserve to be attacked. Developing countries with weak institutions, desperately in need of quick-release crisis support, are rightly concerned that there
is only one medicine being offered, and that it may be painful and could even
turn out to be based on the wrong diagnosis. Perhaps there is something to the
notion, if only incidentally, that this Washington-centric, and sometimes quasiconspiratorial, view of the world is not in their best interests. What is sometimes
flippantly characterised in the literature on international capital markets as
‘short-term irrationality’ could have serious long-term developmental implications for poor, transitional economies.
In this debate, in some respects at least the IMF is an easy target. The institution was, in retrospect, as unprepared for the crisis as the rest of us, yet it was
charged as the principal multilateral institution responsible for its resolution. But
while the evidence that the Fund tripped up early in the crisis is compelling, as I
have argued elsewhere, through much of the Stiglitz volume, and especially in
the sections dealing with the Asian economic crisis, I experienced a ‘yes … but’
reaction. Was the IMF really so stupid, wrong, indeed malevolent? That is, while
it was certainly at ‘the scene of the crime’, was it (as Stephen Grenville asks elsewhere in this issue) the principal villain? What role did the governments of the
crisis-affected economies play, or were they merely passive bystanders?
For example, the mishandling of the sequencing of reform issue is central to
the argument. Yet Professor Stiglitz appears unaware of the fact that Indonesia
had opened its capital account way back in 1971. No doubt the international institutions played a role in this decision, as they were then still quite heavily
involved in Indonesian economic policy making. But, to the knowledge of this
reviewer, the decision was primarily driven by Indonesian economic policy makers who, with memories of Sukarno-era excesses still fresh in their minds, argued
that this and the ‘balanced budget rule’ would constrain government policy mistakes.
Similarly, on another key sequencing issue, financial liberalisation, there is no
evidence that the IMF (or the World Bank for that matter) was the key actor in
Indonesia’s decision to open up in 1988. On both counts, therefore, in discussing
the lead-up to the crisis, one wonders how well the Indonesian experience fits
with Stiglitz’s explanatory framework, particularly on these major vulnerability
indicators.
Finally, in diagnosing the crisis, the book is silent on the deterioration of the
Soeharto regime in the years leading up to the crisis, in terms of both the quality
of economic policy making and the rapidly proliferating, palace-based cronyism.
In fairness, Stiglitz’s volume is primarily concerned with how international
organisations have allegedly mismanaged the process of globalisation, and thus
the reader would not expect detailed country analyses. But as with literature on
the role of the IMF in other economic crises—that on the Philippines under Marcos readily comes to mind—one does need at least something of the domestic
context to understand events. To sheet home all the blame to external actors is
surely to miss this dimension, which was critical to the Indonesian story, if less so
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to those of the three other East Asian crisis countries.
In sum, this highly influential and powerful book deserves to be read widely,
for its insights into international institutions, the reform process in developing
countries, and crisis management. While one might quibble at the margins, for
example on some of the arguments as they pertain to Indonesia, the author has
surely made a compelling case for approaching globalisation cautiously, for
extracting its undoubted benefits judiciously, and for reforming the IMF.
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Hal Hill
ANU
Andrew MacIntyre (2003), The Power of Institutions: Political Architecture and
Governance, Cornell University Press, Ithaca NY, pp. xi + 189. Cloth: US$42.50;
Paper: US$17.50.
This monograph is about the influence of formal political institutions on the management of policy. MacIntyre’s principal contribution is to develop deductively
an hypothesis which he terms the ‘power concentration paradox’: countries
whose political institutions highly concentrate national decision making in the
hands of just a few, or disperse decision making powers widely among many,
appear to fare equally poorly at managing policy under crisis conditions. He
hypothesises that these polar variants of institutional power dispersal give rise to
systematic (albeit different) governance problems that are not typically the norm
in the case of intermediate variants.
The intended audiences are two: those interested in the sources of problems of
policy management in developing countries generally; and those with specific
interest in Southeast Asia. The first audience will find refreshing MacIntyre’s
holistic focus on broad political institutional configurations as his independent
variable (in contrast to a micro focus on electoral systems, or parliamentary or
presidential constitutional arrangements). As a political scientist, he is interested
in broad variables (‘institutional architecture’, ‘policy responsiveness’) and seeks
to discern, through the empirical mists, the topography of the forest (e.g. overall
national patterns of economic policy management), rather than the specific shape
of the trees (e.g. how specific institutions influence specific policies). Some readers, particularly those from the second audience, doubtless will baulk at this
heroic concentration of multiple aspects of institutions and policy making into
two grand variables.
The approach used is deductive theorising, combined with empirical forays to
the region based on the author’s previous work, on newspaper and magazine
reports, and on secondary sources on both the theoretical and empirical sides.
MacIntyre’s writing style is chatty and relatively accessible, even in the theoretical sections. The heuristic device, veto player analysis, that he marshals to calibrate the degree of fragmentation in decision making in his four cases (Indonesia,
Malaysia, the Philippines and Thailand) need not strike fear into the hearts of the
theory-impaired. It is a simple tool, employed primarily and to good effect in the
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core chapter 4 to locate each of the countries along a continuum measuring dispersal of decision making power.
The crisis MacIntyre engages, in order to put his variables in motion, is the
Asian economic crisis of 1997–98. Times of crisis offer both a common catalyst for
his chosen cases and the promise of ‘exposing starkly the bare bones of a polity’
(p. 53). Having employed the same logic in my own work (Bowie and Unger
1997), I am aware of its potential pitfalls. Specifically, there is the question of
whether it was really the same crisis for each of the four cases. President Ramos
may have had more success at rallying his legislative chambers to needed policy
changes than was the case for successive Thai prime ministers, not because the
institutions of decision making were any less fragmented than in Thailand, but
rather because the economic characteristics of the Philippines at the time (relatively low inflows of foreign investment, relatively low manufactured exports as
a proportion of GDP) made the adverse effects of the crisis less marked.
Policy responses to the crisis can be categorised as legislative or administrative. By choosing to define veto players as those institutions (e.g. parties) or individuals (e.g. presidents) who have ‘an inalienable discretionary power to veto
legislative change by withholding their approval’ (p. 38), MacIntyre privileges
policy responses that take the form of legislation, and finesses cases such as the
Philippines, where most of the policy response to the crisis was administrative
(by claiming these administrative powers had at an earlier time been granted by
legislative action). While certainly those who have veto power over legislation
may be able to block administrative policy responses as well, they do not always
have the ability to generate and pass legislation to preempt other administrative
responses. Some readers may discount the veto player analysis for its focus on
policy as legislation, but in any case MacIntyre’s analysis of the cases (chapter 4)
fortunately does not allow itself to be hamstrung by a legislative focus, and discusses administrative policy responses in all four cases.
Overall MacIntyre’s contribution is a valuable one, both for its theorising about
political institutional frameworks and how they shape broad approaches to policy making (the paradox), and for its finely honed and systematic comparison of
the empirical record from the four Southeast Asian country cases (chapter 4). I
believe this small monograph has the potential to stimulate a wide range of new
research in Southeast Asia and in the developing world at large.
Alasdair Bowie
Jakarta
Reference
Bowie, Alasdair, and Danny Unger (1997), The Politics of Open Economies: Indonesia,
Malaysia, The Philippines and Thailand, Cambridge University Press, Cambridge.
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Edward Aspinall and Greg Fealy (eds) (2003), Local Power and Politics in
Indonesia: Decentralisation and Democratisation, Institute of Southeast Asian
Studies, Singapore, pp. 304. Cloth: S$59.90/US$39.90; Paper: S$39.90/US$25.90.
Local Power and Politics in Indonesia is an excellent report on the first 20 months of
post-Soeharto reform-era decentralisation, which began in January 2001 with the
implementation of Laws No. 22 and 25 of 1999 on the devolution of administrative and fiscal authority. Indeed, it is an indispensable starting point for scholars
conducting research on the subject or for politicians, policy makers and citizens
who want to assess early decentralisation successes and failures.
The latest volume in the Indonesia Update Series, Local Power and Politics in
Indonesia is a collection of essays most of which were presented at the annual
Update conference at the Australian National University in September 2002. Following the usual conference format, two initial chapters (this time by political scientist Harold Crouch and economist Mohamad Ikhsan) cover developments of
the previous year, providing continuity for the series as a whole and a context for
the theme-specific papers. The remaining 14 chapters, plus an introduction by the
editors, explore the 2002 Update theme of ‘decentralisation, democratisation, and
the rise of the local’.
Editors Aspinall and Fealy have written an exceptionally clear, concise and
comprehensive introduction. Their basic claim, amply supported in the substantive chapters, is that ‘decentralisation is closely bound to the wider politics of
democratisation’ (p. 9). In other words, the success of the democratisation project
in post-Soeharto Indonesia is heavily dependent on the success of decentralisation in democratising local politics and in constructing the foundation—administrative, political, economic, social, and cultural—for democratisation at the
national level.
Aspinall and Fealy report two main criticisms of decentralisation policy and
practice in the current Indonesian debate: the prospects that the quality of governance will suffer and that national unity will be undermined. The governance
issue is further usefully specified as the ‘incapacity of local administrations,
growing inequalities between rich and poor regions, and worsening corruption
and money politics’ (p. 5). The editors identify the main opponents of decentralisation, most of whom stand to lose power if decentralisation succeeds, and a
more diverse constellation of defenders, some self-interested but many motivated
by a reformist vision.
The book’s major value is in the richly informative substantive chapters, both
the six regional case studies (this view reflects perhaps my own decades-long
methodological bias) and the more general analyses of the implementing process
(Arellano A. Colongon, Jr), local elite changes and continuities (Michael S. Malley), and the persistent power of the armed forces (Marcus Mietzner). The conclusion of most of these chapters is negative, in the sense that the authors find little
evidence that the implementation of decentralisation to date supports either local
or national level democratisation.
Malley concludes that despite the rapid replacement of district heads (bupati)
and mayors, ‘the old political–administrative elite has managed to adapt to the
new rules and consolidate its control’ (p. 115). Malley, Mietzner and other authors
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place much of the blame for this situation on the inability of political parties, at
least in this early period, to fill the gap created by the collapse of the New Order’s
pyramidal power structure. The institutional power of the New Order has
become the personal power of locally well placed elites, much as the state enterprise officials in the old Soviet Union transmogrified into the business barons of
today’s Russia. Making matters worse, the armed forces (TNI) remain a major
local player. According to Meitzner, ‘the increased flow of money to the regions,
the declining opportunities at the centre, and the need of local governments for
an efficient security force have made the regions all the more attractive for the
TNI’ (p. 252).
The regional case studies echo these themes. Vedi Hadiz sees increasing militarism, gangsterism (premanisme) and money politics in North Sumatra. Minako
Sakai unravels the skein of self-interested actions by local elites in the Padang
Cement controversy in West Sumatra. This well publicised incident has done
much to discourage potential investors, both domestic and foreign, in the
reformation-era economy. In many regions, Sakai adds, local actors are now
manipulating national elites, reversing the three-decade New Order pattern.
George Quinn argues that local autonomy movements in Java—his examples are
Banten, Cirebon and nearby Madura—have been driven by ‘commercial and
political opportunism’ (p. 164). In once radical Blora, a district in north Central
Java, Amrih Widodo discerns a timid resurgence of class, or at least populist, politics in 1998 that was soon suppressed by local business and government elites.
For balance, or maybe just because of my own predilection for the half-full
glass, I will end by quoting a more positive assessment of the progress of decentralisation. M. Ryaas Rasyid is former minister of state for regional autonomy and
long a major player in decentralisation politics. He believes that ‘the decentralisation process, more than any other government program, will provide the basis
for real and lasting stability in Indonesia. The reason is simple: regional autonomy is founded on both reality and idealism …. The fear of diversity that drove
so many Soeharto-era policies was baseless. The over-centralisation that resulted
from this fear almost did bring about disintegration. Thankfully, that era has now
passed’ (p. 71).
R. William Liddle
Ohio State University, Columbus OH
Carol J. Pierce Colfer and Ida Aju Pradjna Resosudarmo (eds) (2002), Which Way
Forward? People, Forests and Policymaking in Indonesia, Resources for the Future,
Washington DC; Center for International Forestry Research, Bogor; and Institute
for Southeast Asian Studies, Singapore, pp. xix + 433. Paper: S$39.90/US$24.90.
An old brain-teaser has a traveller arriving at a crossroads only to find that the
signpost is down. How can he find the correct road to take? The answer, of
course, is to orient the sign correctly in relation to the road already travelled. The
gloomy conclusion of this excellent and important book is that for Indonesia’s
forest resources, the past is unlikely to provide anything like such a clear guide
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to future policy—other than in providing lessons on what not to do.
Exploitation of Indonesia’s forests—the third largest tropical forest area in the
world—has long been a prominent feature of its economic development. Since
the end of the Soeharto era in 1998, however, the country’s forest policies, like its
politics and economics, have been a shambles. Multiple uncertainties about the
direction of future policy arise from changes in forest and timber industry policies of course, but also from concurrent changes in broader political and legal
institutions, the allocation of powers and responsibilities between levels of government, the assertion and redefinition of local and community property and forest use rights, and the effects of the recent severe economic crisis. The country’s
decisive break with its past means that all these issues are simultaneously in play;
there is little history of incremental reform upon which to build.
Which Way Forward? brings together 26 authors contributing 16 essays. It also
contains introductory and concluding chapters, and an afterword by Emil Salim,
former Indonesian minister for population and the environment. The content was
written for the most part in 1999, in the immediate wake of Soeharto’s fall. The
authors are mainly social scientists and forest scientists, and the content strongly
reflects this disciplinary mix: politics, political and legal institutions, social organisation, and forest and timber industry policies all receive in-depth and carefully
contextualised treatments. The content is uniformly very well written and edited
for a non-technical readership. The index provides a helpful guide to subject matter, and a ‘timeline of significant legislation’ provides an important and very useful appendix.
Taken together, these essays document the precarious state of Indonesian forest policy in the aftermath of the collapse of an authoritarian, highly centralised
and often arbitrary state. Early chapters ably document the nature and effects of
New Order policies and processes codified, for the most part, in the 1967 Basic
Forestry Law (BFL). This established a legal and institutional framework for
state-supported commercial forest exploitation. Tensions between commercial/
industrial rights and those of communities over forest use were resolved in the
BFL by ‘categorically excluding’ forest communities and denying legitimacy to
adat (traditional law) (p. 215).
Laws passed in 1999 amended the BFL, while others in 2000 devolved substantive powers to local government. These initiatives mark the country’s first genuine attempt at decentralised forest management. They are deeply flawed,
however, as documented in several chapters. They are unclear on commercial
timber policies versus the rights of traditional forest communities, and ambivalent on state versus local powers and responsibilities. They are, moreover, laws
enacted in a transitional moment during which regional and village elites, freed
from the strictures of centralised New Order governance, began themselves to
initiate de facto decentralisation of local development policies. Lacking either a
strong (though arbitrary) central state or a clear set of rules for decentralised forest management, ‘policy implementation has depended to a great degree on personalities and place. The lack of certainty in the law, combined with the lack of a
legal structure linking the forest resource to its users, has created a free-for-all in
which forest management has become the responsibility of no-one’ (p. 24). Virtually the only certainty is that Indonesian timber removal rates, at about 80 million
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cubic metres per year, exceed even the government’s own ‘sustainability criterion’ by a factor of more than three (p. 216).
Questions about the way forward are clearly uppermost in the authors’ minds.
Chapters by Resosudarmo, Barr and Sunderlin all include clear analysis and sensible timber industry policy proposals, and identify tensions between incentives
and institutions for commercial exploitation, on one hand, and the rights and
responsibilities of traditional communities on the other. Further excellent contributions focus on village and local institutions for forest management, and on economic and legal factors contributing to the expansion of commercial agriculture
(particularly oil palm), which takes place largely at the expense of forest. A problem for all the authors, however, is that of the leap to a higher level of analytical
integration. On the set of forest policy issues that seem most clearly in need of
joint resolution—that is, rights to forests and norms for their sustainable use by
communities as well as firms—we are ultimately left with more questions than
clear normative direction. As a result, the set of questions posed at the end of
Resosudarmo’s chapter (p. 182) impart the troubling sense that a practical framework for integrated forest management remains elusive.
It is natural that a work of this scope and ambition should fall short in a few
areas. Bennett’s chapter on village governance relies on a more polemical style
laden with rhetorical flourishes that lengthen the text without adding much
meaning. Dudley’s chapter on illegal logging avoids the hard task of gathering
and examining data and is instead dominated by a sequence of incomprehensible
flow diagrams, poor substitutes for a clear, theory-driven analysis. There is a general tendency to eschew formal techniques for the examination of economic and
social data, as a consequence of which I recommend that this volume be read in
conjunction with the excellent and highly data-driven collection edited by Gérard
and Ruf (2001).
Overall, this is a rare and truly valuable set of essays documenting a historic
transition in a major developing nation. The authors show very clearly how the
past has brought Indonesian forest policy to its present crossroads, and give us an
excellent map of the surrounding policy and institutional landscape. But the
inescapable and depressing conclusion is that the solution to Indonesia’s complex
of forest problems remains uncharted territory. Which Way Forward? is right to
keep the question mark in its title.
Ian Coxhead
University of Wisconsin–Madison
Reference
Françoise Gérard and François Ruf (eds) (2001), Agriculture in Crisis: People, Commodities
and Natural Resources in Indonesia, 1996–2000, CIRAD, Montpellier, France; Curzon,
Richmond, UK.
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Nick J. Freeman (ed.) (2003), Financing Southeast Asia’s Economic Development,
Institute of Southeast Asian Studies, Singapore, pp. xvi + 372. Paper:
S$56.90/US$34.90.
This book is a welcome contribution to the literature on financing development
in Southeast Asia, although its coverage of Indonesia, Malaysia, Singapore, Thailand and the Philippines (the original five ASEAN nations) is much more complete than that of the other Southeast Asian countries. The 11 chapters and two
appendices are of quite widely varying length and quality, and cover most
aspects of financing development. Their discussion generally ends with 2001, and
emphasises the policy lessons learnt from the 1997 economic crisis.
Chapters 1, 2 and 10 deal with more macro issues, whereas the other chapters
are on specific types of finance. ‘External Financing under Financial Globalization: An East Asian Perspective’ by Akira Kohsaka (chapter 1), surveys patterns
and components of international capital flows to emerging markets, reviews policy lessons learnt from the financial crises in the 1990s, and pursues possible policy choices to address the fragilities associated with volatile capital flows to those
countries. It emphasises the need to find tailor-made prescriptions for individual
economies in the context of their own institutional infrastructure, and argues that
unconditional capital account liberalisation could be very dangerous. ‘Managing
the Debt Burden in Southeast Asia’, by Homi Kharas and Sudarshan Gooptu
(chapter 2), has an excellent discussion of the factors contributing to the increase
in public debt in seven ASEAN countries, and of sovereign debt management.
This, like the other chapters, uses no mathematical models, making it more accessible to general readers but resulting in less analytical rigour. Ngiam Kee Jin’s
chapter 10, ‘Regional Financial Integration in Southeast Asia’, discusses the financial integration policies of the original five ASEAN countries , the extent of their
financial integration, the arguments for and against financial integration among
ASEAN members, and the mechanisms to achieve it. He warns about the risk of
greater regional instability from increased regional financial integration, and lists
ways of lessening it.
The volume covers most types of finance other than taxation, Islamic finance
and small and medium enterprise finance. The long chapter 4, ‘The Challenges of
Microfinancing in Southeast Asia’ by John D. Conroy, contains excellent case
studies comparing seven countries (excluding Brunei, Singapore and Myanmar)
and is particularly good on Indonesia. It presents some worthy general guidelines for microfinance development, but makes little reference to the theoretical
literature. Unlike the others, this chapter contains a glossary of acronyms. There
is no discussion of the possibility that, even though it benefits the borrowers,
microcredit might result in little positive or even negative social benefit because
of external diseconomies created in saturated markets or overexploited commons.
Khalili Khalil’s short chapter 6, ‘Developing the Role of Venture Capital in
Southeast Asia’, demonstrates a deep understanding of the importance of venture
capital and factors affecting its supply, mainly in Malaysia. He recommends
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increasing the supply of venture capital through intensive training courses,
recruitment of analysts conversant with high technology, increased provision of
government incentives, an
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To cite this article: (2004) Book reviews , Bulletin of Indonesian Economic Studies, 40:1,
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Bulletin of Indonesian Economic Studies, Vol. 40, No. 1, 2004: 117–33
Taylor & Francis Group
BOOK REVIEWS
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Lloyd Kenward (2002), From the Trenches: The First Year of Indonesia’s Crisis of
1997/98 as Seen from The World Bank’s Office in Jakarta, Centre for Strategic and
International Studies, Jakarta, pp. 150. US$25.00 + US$10.00 airmail postage.
The first 100 pages of Lloyd Kenward’s book were written in late 1998 and provide a clear and lively account of Indonesia’s economic crisis up to that point. In
the final 30 pages he tries to draw lessons and explain why things went so wrong.
An epilogue of just over one page brings the story up to September 1999.
Kenward’s survey of events covers a lot of the same ground covered by the
surveys written for BIES, but he has two advantages over the BIES survey writers: having been an official working in the World Bank office in Jakarta during the
crisis allows him to write partly as an insider, and by covering a whole year he
can follow developments in particular areas in a more coherent way than is possible in a series of surveys covering just four months each. Indeed, it is a pity that
the book does not cover a still longer period, since there is no obvious logic for
the late 1998 and late 1999 finishing points. Perhaps they were imposed by
changes in where Kenward happened to be working. I found the assignment of
crucial parts of the account to footnotes and boxes irritating because it interrupts
the flow of the main text. Another minor defect is that there is no index.
While the survey of events admirably fulfils the title’s promise of a soldier’s
view from the trenches, the last chapter, which deals with the big questions of
how the generals should have conducted the war, is much more open to criticism.
Obvious questions for a book on Indonesia’s crisis are: What did the government
do wrong? What advice should the IMF and the World Bank have given? If the
best advice had been given and followed, would things have been much different? It is obviously very hard to give confident answers to such questions. My
own view is that Indonesia’s crucial policy mistakes were Bank Indonesia’s failure to commit itself to credible and restrained monetary growth and the government’s failure to make the new bankruptcy legislation effective. The former
failure justified investors’ loss of confidence in the value of the rupiah; the latter
failure left insolvent firms in a limbo in which their original owners retained the
assets but were unable to obtain the working capital needed to use these assets
productively. Soeharto’s illness, anti-Chinese riots and the government’s public
brawl with the IMF over its failure to implement the agreed package obviously
hurt too.
Kenward mentions the lack of progress on bankruptcy reform, criticises the
excessive amount of unsterilised liquidity support poured into the banking system around the end of 1997 (p. 121) and praises the increase in interest rates at the
end of March 1998 (p. 83). However, these policy failures do not receive anything
like the prominence that he gives to the government’s lack of commitment to the
ISSN 0007-4918 print/ISSN 1472-7234 online/04/010117-17
DOI: 10.1080/0007491042000205231
© 2004 Indonesia Project ANU
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microeconomic reforms recommended by the Bank and the IMF. Kenward sees
this lack of commitment as having been the government’s most serious policy
mistake. He views microeconomic reform not just as a way of eliminating various
microeconomic inefficiencies, but also as a partial solution to the financial crisis.
He argues that the government’s lack of commitment to these reforms meant that
too much weight had to be put on monetary and fiscal contraction in an attempt
to restore investor confidence.
An opposite view to Kenward’s on the significance of microeconomic reform
is that of Paul Volcker, the former Chairman of the US Federal Reserve. At the
suggestion of Lee Kuan Yew, Volcker was invited by Soeharto to visit Jakarta in
January 1998 to comment on the IMF package. He poked fun at its ‘recipe section’—that is, the microeconomic reforms to the markets for cloves, oranges,
cashews, vanilla, soy beans, dairy products, cooking oil, sugar, wheat and wheat
flour. Kenward deals with this major objection to his main thesis in a footnote. He
notes that Volcker ‘couldn’t see what lifting these monopolies had to do with
financial stabilization’ (p. 45), but he does not flag the fact that Volcker’s seemingly reasonable scepticism, if correct, contradicts his own thesis that far reaching
microeconomic reform was the way out of the financial crisis.
My guess is that Volcker was right and Kenward wrong. In normal times, the
World Bank and the IMF are right, in my view, to recommend microeconomic
reforms that would probably raise national income by eliminating what neoclassical text books refer to as ‘triangles of deadweight loss’. In normal times, the
government of a developing country can accept the recommendations that suit it
and reject the rest—just as the governments of industrialised countries often act
in ways far removed from what Adam Smith or Milton Friedman might recommend. However, in my view, the only microeconomic reforms that are relevant to
restoring confidence in the currency and the financial system are things, like
bankruptcy reform and prudential regulation, that relate directly to the efficient
functioning of the financial system. On this view, the ‘recipe section’ of the IMF
package for Indonesia was a rather arrogant irrelevance on the part of the staffs
of the IMF and World Bank. The crisis had nothing to do with agricultural and
manufacturing monopolies, but provided the international institutions with an
opportunity to force the government to speed up its acceptance of the text book
policies that they had been pushing with only limited success for many years. It
is one thing to think that free trade and open competition are generally beneficial,
and quite another to force these policies on a sovereign government that does not
wish to adopt them, but is desperately anxious to obtain outside financial assistance
Regardless of whose view of microeconomic reform is correct, it is surprising
and seemingly inconsistent of Kenward to heap criticism on the government for
backsliding on the reforms to which it was committed under the various agreements with the IMF, and also to criticise Soeharto for being too prompt in reducing the subsidies to food and fuel. When discussing the riots that finally toppled
Soeharto and that were sparked by the partial removal of these subsidies in April
1998, Kenward notes that although the 50% rise in fuel prices was in line with the
World Bank’s recommendations, the implementation of this policy in April 1998
was well ahead of the World Bank’s July 1998 deadline. He adds: ‘To their great
credit, the IMF and a number of ministers advised against such harsh action
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(p. 95)’. Quite why delay on other microeconomic reforms was disastrous, but
delaying subsidy removal from April to July 1998 would have been desirable, is
not explained.
The above criticisms of Kenward’s analysis of the role of non-financial microeconomic reforms do not detract from the book’s chief merit, which is to provide
an excellent account of what happened, and when, during the first year of Indonesia’s economic crisis. All BIES readers would benefit from reading it.
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George Fane
ANU
Dani Rodrik (ed.) (2003), In Search of Prosperity: Analytic Narratives on Economic
Growth, Princeton University Press, Princeton, pp. 481 + vi. Paper: $32.50;
£21.95; Cloth: $59.50; £39.95.
Joseph Stiglitz (2002), Globalization and Its Discontents, Allen Lane The Penguin
Press, London, pp. 282 + xxii. Paper: A$24.95; US$15.95; Cloth: US$24.95.
These two volumes, one focused on growth and the other on crises, are edited
and authored respectively by two of the world’s most eminent economists. They
will probably set the intellectual agenda for thinking about issues of economic
development in the global economy for some time to come. Indonesia is not central to either volume: it is covered in one of 14 chapters in the Rodrik volume, and
it receives scattered attention in Stiglitz. However, both volumes contain much of
analytical and policy relevance for the country, which enters the story in the context of both growth and crisis episodes. The purpose of this review is to summarise the insights on Indonesia, and to draw out some general lessons from the
discussion.
The major appeal of the Rodrik volume is that it presents a series of excellent
country case studies cast in a rigorous analytical framework. An eclectic group of
countries is included—six Asian (India receives two chapters), two each from
Eastern Europe and Africa, three from Latin America, and one high-income economy (Australia). Their growth outcomes vary enormously: high-growth China
and the two African stars (Botswana and Mauritius), perennial under-performers
like Pakistan and Bolivia, and the three Southeast Asian economies to have experienced major reversals in their fortunes in the last 20 years, one positive (Vietnam), the others negative (Indonesia and the Philippines).
A novel feature of the volume is that these are not country case studies in the
traditional sense of providing a general review of socio-economic development.
Rather, they (and their authors) are selected to shed light on key analytical questions and debates in the development economics literature. As the editor
explains, in the field of economic growth, there has been a rapid expansion of
cross-country econometrics. But there is always the lurking suspicion that ‘econometrics can be used to prove anything’, and thus it is useful to expose this crosscountry work to the reality check of country case studies and, equally important,
vice versa. Moreover, the book is motivated by the ‘serious gaps in the existing
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research’ on the factors determining economic growth, and why some countries
appear better able to adopt the ‘right’ policies. The resultant ‘analytical country
narratives’, not necessarily written by country specialists, are guided by the well
established growth literature, together with emerging political economy formulations, particularly as they shape institutional quality. This volume is in the tradition of high quality country studies such as the Bhagwati–Krueger NBER trade
and development series of 20 years ago and the Little et al. World Bank macro
series of the early 1990s (though neither series perhaps receives the recognition it
might have in the volume under review).
Rodrik’s stimulating introduction lays out the research agenda, based on his
threefold taxonomy of growth determinants: geography, integration (trade) and
institutions. Drawing on the contributions to this volume, together with his own
extensive writings, he highlights six principal conclusions. The connecting theme
is that the quality of institutions is central to an understanding of growth outcomes. These institutions need to be developed on the basis of local conditions,
and sometimes involve experimental adaptation. Reassuringly, though, the onset
of economic growth does not appear to require deep institutional reform, as illustrated by both the Chinese and Indonesian experiences. Aside from institutions,
Rodrik argues that both geography and trade policy are less important factors
than is commonly asserted. The first of these arguments is now increasingly in
the mainstream. But the second still belongs firmly in the ‘heterodox’ camp, and
receives at best mixed support from the subsequent country studies.
In passing, since institutions are so central to the volume, one wonders
whether perhaps it might have also included a ‘state of the art’ survey of the literature on this subject, assessing definitions, empirical proxies (the latter in particular in the context of the feasibility of long-term growth econometrics), and
causal channels. Presumably it is possible to have ‘good’ institutions but poor
economic policies and low growth. The highly interventionist development
strategies of India and Fiji for much of their post-colonial histories readily come
to mind. Moreover, it may well be that openness to the global economy exerts an
independent discipline on institutional quality, and mitigates the possibility of
deterioration. Such an argument appears plausible in the case of Malaysia, for
example.
Jonathan Temple’s provocatively but aptly titled chapter, ‘Growing into Trouble: Indonesia after 1966’, synthesises Indonesia’s development experience over
the last third of the 20th century. BIES readers will find little that is new in his
description of events. Rather, the principal analytical attraction is how a major
international authority in the growth literature tackles the subject. That is, how
might growth theory be employed to shed light on Indonesia’s development outcomes?
A key argument of this excellent and thoughtful chapter, and a view now
widely accepted in Jakarta, is that the Soeharto regime did not use the opportunity of 30 years of rapid economic growth to build stronger institutional structures, able to withstand both leadership transitions and economic crises. Hence
its achievements were always ‘precarious’. Dipping into the economic growth
and political economy literatures (including, reassuringly, articles from BIES),
Temple notes the conventional explanations for high growth, especially good policy (mainly macro stabilisation) and good luck (including the green revolution
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and the oil boom in the 1970s, and strong East Asian growth throughout). He also
draws attention to the fact that Indonesia avoided a good deal of the ‘predatory
state’ phenomenon common in resource-rich countries with weak institutions.
Like everybody else working on Indonesia, Temple struggles somewhat in the
search for a coherent explanation of the country’s abrupt reversal of fortunes in
1997–98. He is attracted to the Olsonian notion that rapid growth can be a destabilising force, and also to the Dani Rodrik view that exogenous shocks are more
difficult to manage in countries with latent social conflict and weak institutions
for handling conflict.
These arguments do have intuitive appeal. The question is: How far do they
get us? Perhaps Indonesia’s growth was ‘unbalanced, … unevenly spread among
regions and ethnic groups’ (p. 175). The data do not really support these assertions, though: inter-regional inequality (as measured by average provincial
household expenditure) remained remarkably stable from the early 1970s, when
such data were first released, and I am unaware of any reliable and detailed data
on income by ethnic group (certainly none disaggregated into pribumi and nonpribumi categories). Yet Temple is surely correct if he is referring to widely held
perceptions of distributional impact. Moreover, Temple could reply that the
apparently successful regional story has been complicated by socially disruptive
large-scale migrations, some officially sponsored.
More generally, these important speculative forays need to be assessed also for
their explanatory power during other Soeharto-era crises. The most important
was during the mid 1980s, when international oil prices collapsed and Indonesia
could well have followed Mexico into deep economic crisis. Yet, as Temple effectively documents, Indonesia pulled through this period adroitly and growth was
quickly restored. Thus, the destabilising effects of a combination of growth, latent
social conflict and weak institutions were certainly not insurmountable problems
then. An obvious rejoinder to this commentary is that by 1997 Indonesia had
changed significantly, and in such a way that it had to develop higher quality
institutions. Soeharto was inevitably approaching the end of his long rule. Moreover, having opened up its financial sector in the late 1980s, in the 1990s world of
rapidly increasing and volatile global capital flows the country needed much
higher standards of financial regulation, more sophisticated exchange rate management, and much else. In sum, Jonathan Temple’s chapter is undoubtedly one
of the most important written on Indonesian economic development, and it will
be of great interest to country specialists and general development economists
alike.
There is a great deal else of interest in this volume, beyond the scope of this
review. There are the puzzles of other kinds of ‘growth collapses’ (e.g. Venezuela)
and also the two successful ‘African exceptions’, Botswana and Mauritius (the
former at least a success before the advent of HIV–AIDS). For Pakistan, William
Easterly sees the issue as ‘growth without development’, in the sense that large
groups of the community are excluded from what has been in aggregate a moderately respectable economic record.
In a rich and nuanced chapter comparing the Philippines and Vietnam, Lant
Pritchett rightly emphasises that growth recipes and therefore policy advice vary
greatly, depending on a country’s economic and institutional circumstances. On
the Philippine record, of much relevance to post-Soeharto Indonesia, he confronts
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the conundrum that, post-Marcos, the country (which is ignominiously labelled
a ‘Democratic Dud’!) has broadly met many of the political requirements of the
so-called ‘Washington consensus’. These include a free press, open and reasonably fair elections and an active and vibrant civil society, including a plethora of
NGOs and think tanks, not to mention good and reasonably broad-based human
capital indicators. It has also opened up its economy, while fiscal policy has generally been (just) adequate. Yet its economic performance has been frustratingly
poor, with current per capita income similar to that of the early 1980s. Pritchett’s
conclusion, that the post-Marcos political economy arrangements have actually
increased ‘institutional uncertainty’, is largely untested and does not connect
much to his earlier theoretical reasoning. But it is a proposition this reviewer
finds very appealing.
In sum, this absorbing volume takes country economic studies to a new analytical plane, and is essential reading for anybody interested in modern development economics. An understanding of a country’s economic performance ideally
requires both the immersion experience of country experts and the interpretive,
analytical skills of growth theorists. Often, these two literatures sit uncomfortably
beside each other, but hardly communicate. This book demonstrates nicely how
the two can be productively integrated.
Turning to the Stiglitz volume, it is difficult to know what to add to the debate
that has raged over arguably the most famous and widely read economics book
in recent years. The central tenets of this volume are well known, and need not
be repeated here in any detail. The IMF, and behind it the US Treasury and ‘Wall
Street’, are alleged to have grossly mismanaged developing countries’ engagement with the global economy, especially among transitional economies and
those experiencing sudden crises. Countries are forced to open their capital
accounts and liberalise their financial sectors prematurely (e.g. p. 129: ‘The IMF
told countries in Asia to open up their markets to hot short-term capital’). An ideologically driven, ‘one-size-fits-all’ policy framework is forced upon countries
seeking IMF support. No alternatives are placed on the policy agenda. Reports
are practically written from Washington DC prior to field missions. Policy conditionality is rigid and excessively intrusive. Fiscal prudence is elevated above
social concerns. Economic policy advice and conditionality are callously dispensed from luxury hotels.
Indonesia’s 1997–98 crisis is central to Stiglitz’s attack on the IMF, though the
country enters centre stage only briefly, on several occasions. According to
Stiglitz, the Fund dictated policy to the government of ‘Mohammed Suharto’ as
in the other crisis-affected economies. ‘Capital account liberalization was the single most important factor leading to the crisis’ (p. 99, italics in original). The IMF was
partly responsible for the onset of the crisis, he argues, and it exacerbated the
downturn. Its reform program was analogous to ‘crying fire in a crowded theater’. Tightened fiscal policy and the sudden bank closures of November 1997 are
central to the critique as it relates to Indonesia. The process was politically mismanaged, too, especially following the January 1998 photograph of the IMF Managing Director ‘… standing with a stern face and crossed arms over the seated
and humiliated president of Indonesia’ (p. 41). Social conditions were unnecessarily aggravated (the volume includes the contentious assertion that Indonesia’s
unemployment rate rose tenfold, p. 97).
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This is a polemical treatise by one of the greatest economists of our times. The
passion, conviction and anger of the 2001 Economics Nobel Laureate permeate
every page. And we do need to worry, deeply, about the issues raised. Externally
dictated policy mistakes that condemn countries to underdevelopment and
poverty deserve to be attacked. Developing countries with weak institutions, desperately in need of quick-release crisis support, are rightly concerned that there
is only one medicine being offered, and that it may be painful and could even
turn out to be based on the wrong diagnosis. Perhaps there is something to the
notion, if only incidentally, that this Washington-centric, and sometimes quasiconspiratorial, view of the world is not in their best interests. What is sometimes
flippantly characterised in the literature on international capital markets as
‘short-term irrationality’ could have serious long-term developmental implications for poor, transitional economies.
In this debate, in some respects at least the IMF is an easy target. The institution was, in retrospect, as unprepared for the crisis as the rest of us, yet it was
charged as the principal multilateral institution responsible for its resolution. But
while the evidence that the Fund tripped up early in the crisis is compelling, as I
have argued elsewhere, through much of the Stiglitz volume, and especially in
the sections dealing with the Asian economic crisis, I experienced a ‘yes … but’
reaction. Was the IMF really so stupid, wrong, indeed malevolent? That is, while
it was certainly at ‘the scene of the crime’, was it (as Stephen Grenville asks elsewhere in this issue) the principal villain? What role did the governments of the
crisis-affected economies play, or were they merely passive bystanders?
For example, the mishandling of the sequencing of reform issue is central to
the argument. Yet Professor Stiglitz appears unaware of the fact that Indonesia
had opened its capital account way back in 1971. No doubt the international institutions played a role in this decision, as they were then still quite heavily
involved in Indonesian economic policy making. But, to the knowledge of this
reviewer, the decision was primarily driven by Indonesian economic policy makers who, with memories of Sukarno-era excesses still fresh in their minds, argued
that this and the ‘balanced budget rule’ would constrain government policy mistakes.
Similarly, on another key sequencing issue, financial liberalisation, there is no
evidence that the IMF (or the World Bank for that matter) was the key actor in
Indonesia’s decision to open up in 1988. On both counts, therefore, in discussing
the lead-up to the crisis, one wonders how well the Indonesian experience fits
with Stiglitz’s explanatory framework, particularly on these major vulnerability
indicators.
Finally, in diagnosing the crisis, the book is silent on the deterioration of the
Soeharto regime in the years leading up to the crisis, in terms of both the quality
of economic policy making and the rapidly proliferating, palace-based cronyism.
In fairness, Stiglitz’s volume is primarily concerned with how international
organisations have allegedly mismanaged the process of globalisation, and thus
the reader would not expect detailed country analyses. But as with literature on
the role of the IMF in other economic crises—that on the Philippines under Marcos readily comes to mind—one does need at least something of the domestic
context to understand events. To sheet home all the blame to external actors is
surely to miss this dimension, which was critical to the Indonesian story, if less so
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to those of the three other East Asian crisis countries.
In sum, this highly influential and powerful book deserves to be read widely,
for its insights into international institutions, the reform process in developing
countries, and crisis management. While one might quibble at the margins, for
example on some of the arguments as they pertain to Indonesia, the author has
surely made a compelling case for approaching globalisation cautiously, for
extracting its undoubted benefits judiciously, and for reforming the IMF.
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Hal Hill
ANU
Andrew MacIntyre (2003), The Power of Institutions: Political Architecture and
Governance, Cornell University Press, Ithaca NY, pp. xi + 189. Cloth: US$42.50;
Paper: US$17.50.
This monograph is about the influence of formal political institutions on the management of policy. MacIntyre’s principal contribution is to develop deductively
an hypothesis which he terms the ‘power concentration paradox’: countries
whose political institutions highly concentrate national decision making in the
hands of just a few, or disperse decision making powers widely among many,
appear to fare equally poorly at managing policy under crisis conditions. He
hypothesises that these polar variants of institutional power dispersal give rise to
systematic (albeit different) governance problems that are not typically the norm
in the case of intermediate variants.
The intended audiences are two: those interested in the sources of problems of
policy management in developing countries generally; and those with specific
interest in Southeast Asia. The first audience will find refreshing MacIntyre’s
holistic focus on broad political institutional configurations as his independent
variable (in contrast to a micro focus on electoral systems, or parliamentary or
presidential constitutional arrangements). As a political scientist, he is interested
in broad variables (‘institutional architecture’, ‘policy responsiveness’) and seeks
to discern, through the empirical mists, the topography of the forest (e.g. overall
national patterns of economic policy management), rather than the specific shape
of the trees (e.g. how specific institutions influence specific policies). Some readers, particularly those from the second audience, doubtless will baulk at this
heroic concentration of multiple aspects of institutions and policy making into
two grand variables.
The approach used is deductive theorising, combined with empirical forays to
the region based on the author’s previous work, on newspaper and magazine
reports, and on secondary sources on both the theoretical and empirical sides.
MacIntyre’s writing style is chatty and relatively accessible, even in the theoretical sections. The heuristic device, veto player analysis, that he marshals to calibrate the degree of fragmentation in decision making in his four cases (Indonesia,
Malaysia, the Philippines and Thailand) need not strike fear into the hearts of the
theory-impaired. It is a simple tool, employed primarily and to good effect in the
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core chapter 4 to locate each of the countries along a continuum measuring dispersal of decision making power.
The crisis MacIntyre engages, in order to put his variables in motion, is the
Asian economic crisis of 1997–98. Times of crisis offer both a common catalyst for
his chosen cases and the promise of ‘exposing starkly the bare bones of a polity’
(p. 53). Having employed the same logic in my own work (Bowie and Unger
1997), I am aware of its potential pitfalls. Specifically, there is the question of
whether it was really the same crisis for each of the four cases. President Ramos
may have had more success at rallying his legislative chambers to needed policy
changes than was the case for successive Thai prime ministers, not because the
institutions of decision making were any less fragmented than in Thailand, but
rather because the economic characteristics of the Philippines at the time (relatively low inflows of foreign investment, relatively low manufactured exports as
a proportion of GDP) made the adverse effects of the crisis less marked.
Policy responses to the crisis can be categorised as legislative or administrative. By choosing to define veto players as those institutions (e.g. parties) or individuals (e.g. presidents) who have ‘an inalienable discretionary power to veto
legislative change by withholding their approval’ (p. 38), MacIntyre privileges
policy responses that take the form of legislation, and finesses cases such as the
Philippines, where most of the policy response to the crisis was administrative
(by claiming these administrative powers had at an earlier time been granted by
legislative action). While certainly those who have veto power over legislation
may be able to block administrative policy responses as well, they do not always
have the ability to generate and pass legislation to preempt other administrative
responses. Some readers may discount the veto player analysis for its focus on
policy as legislation, but in any case MacIntyre’s analysis of the cases (chapter 4)
fortunately does not allow itself to be hamstrung by a legislative focus, and discusses administrative policy responses in all four cases.
Overall MacIntyre’s contribution is a valuable one, both for its theorising about
political institutional frameworks and how they shape broad approaches to policy making (the paradox), and for its finely honed and systematic comparison of
the empirical record from the four Southeast Asian country cases (chapter 4). I
believe this small monograph has the potential to stimulate a wide range of new
research in Southeast Asia and in the developing world at large.
Alasdair Bowie
Jakarta
Reference
Bowie, Alasdair, and Danny Unger (1997), The Politics of Open Economies: Indonesia,
Malaysia, The Philippines and Thailand, Cambridge University Press, Cambridge.
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Edward Aspinall and Greg Fealy (eds) (2003), Local Power and Politics in
Indonesia: Decentralisation and Democratisation, Institute of Southeast Asian
Studies, Singapore, pp. 304. Cloth: S$59.90/US$39.90; Paper: S$39.90/US$25.90.
Local Power and Politics in Indonesia is an excellent report on the first 20 months of
post-Soeharto reform-era decentralisation, which began in January 2001 with the
implementation of Laws No. 22 and 25 of 1999 on the devolution of administrative and fiscal authority. Indeed, it is an indispensable starting point for scholars
conducting research on the subject or for politicians, policy makers and citizens
who want to assess early decentralisation successes and failures.
The latest volume in the Indonesia Update Series, Local Power and Politics in
Indonesia is a collection of essays most of which were presented at the annual
Update conference at the Australian National University in September 2002. Following the usual conference format, two initial chapters (this time by political scientist Harold Crouch and economist Mohamad Ikhsan) cover developments of
the previous year, providing continuity for the series as a whole and a context for
the theme-specific papers. The remaining 14 chapters, plus an introduction by the
editors, explore the 2002 Update theme of ‘decentralisation, democratisation, and
the rise of the local’.
Editors Aspinall and Fealy have written an exceptionally clear, concise and
comprehensive introduction. Their basic claim, amply supported in the substantive chapters, is that ‘decentralisation is closely bound to the wider politics of
democratisation’ (p. 9). In other words, the success of the democratisation project
in post-Soeharto Indonesia is heavily dependent on the success of decentralisation in democratising local politics and in constructing the foundation—administrative, political, economic, social, and cultural—for democratisation at the
national level.
Aspinall and Fealy report two main criticisms of decentralisation policy and
practice in the current Indonesian debate: the prospects that the quality of governance will suffer and that national unity will be undermined. The governance
issue is further usefully specified as the ‘incapacity of local administrations,
growing inequalities between rich and poor regions, and worsening corruption
and money politics’ (p. 5). The editors identify the main opponents of decentralisation, most of whom stand to lose power if decentralisation succeeds, and a
more diverse constellation of defenders, some self-interested but many motivated
by a reformist vision.
The book’s major value is in the richly informative substantive chapters, both
the six regional case studies (this view reflects perhaps my own decades-long
methodological bias) and the more general analyses of the implementing process
(Arellano A. Colongon, Jr), local elite changes and continuities (Michael S. Malley), and the persistent power of the armed forces (Marcus Mietzner). The conclusion of most of these chapters is negative, in the sense that the authors find little
evidence that the implementation of decentralisation to date supports either local
or national level democratisation.
Malley concludes that despite the rapid replacement of district heads (bupati)
and mayors, ‘the old political–administrative elite has managed to adapt to the
new rules and consolidate its control’ (p. 115). Malley, Mietzner and other authors
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place much of the blame for this situation on the inability of political parties, at
least in this early period, to fill the gap created by the collapse of the New Order’s
pyramidal power structure. The institutional power of the New Order has
become the personal power of locally well placed elites, much as the state enterprise officials in the old Soviet Union transmogrified into the business barons of
today’s Russia. Making matters worse, the armed forces (TNI) remain a major
local player. According to Meitzner, ‘the increased flow of money to the regions,
the declining opportunities at the centre, and the need of local governments for
an efficient security force have made the regions all the more attractive for the
TNI’ (p. 252).
The regional case studies echo these themes. Vedi Hadiz sees increasing militarism, gangsterism (premanisme) and money politics in North Sumatra. Minako
Sakai unravels the skein of self-interested actions by local elites in the Padang
Cement controversy in West Sumatra. This well publicised incident has done
much to discourage potential investors, both domestic and foreign, in the
reformation-era economy. In many regions, Sakai adds, local actors are now
manipulating national elites, reversing the three-decade New Order pattern.
George Quinn argues that local autonomy movements in Java—his examples are
Banten, Cirebon and nearby Madura—have been driven by ‘commercial and
political opportunism’ (p. 164). In once radical Blora, a district in north Central
Java, Amrih Widodo discerns a timid resurgence of class, or at least populist, politics in 1998 that was soon suppressed by local business and government elites.
For balance, or maybe just because of my own predilection for the half-full
glass, I will end by quoting a more positive assessment of the progress of decentralisation. M. Ryaas Rasyid is former minister of state for regional autonomy and
long a major player in decentralisation politics. He believes that ‘the decentralisation process, more than any other government program, will provide the basis
for real and lasting stability in Indonesia. The reason is simple: regional autonomy is founded on both reality and idealism …. The fear of diversity that drove
so many Soeharto-era policies was baseless. The over-centralisation that resulted
from this fear almost did bring about disintegration. Thankfully, that era has now
passed’ (p. 71).
R. William Liddle
Ohio State University, Columbus OH
Carol J. Pierce Colfer and Ida Aju Pradjna Resosudarmo (eds) (2002), Which Way
Forward? People, Forests and Policymaking in Indonesia, Resources for the Future,
Washington DC; Center for International Forestry Research, Bogor; and Institute
for Southeast Asian Studies, Singapore, pp. xix + 433. Paper: S$39.90/US$24.90.
An old brain-teaser has a traveller arriving at a crossroads only to find that the
signpost is down. How can he find the correct road to take? The answer, of
course, is to orient the sign correctly in relation to the road already travelled. The
gloomy conclusion of this excellent and important book is that for Indonesia’s
forest resources, the past is unlikely to provide anything like such a clear guide
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to future policy—other than in providing lessons on what not to do.
Exploitation of Indonesia’s forests—the third largest tropical forest area in the
world—has long been a prominent feature of its economic development. Since
the end of the Soeharto era in 1998, however, the country’s forest policies, like its
politics and economics, have been a shambles. Multiple uncertainties about the
direction of future policy arise from changes in forest and timber industry policies of course, but also from concurrent changes in broader political and legal
institutions, the allocation of powers and responsibilities between levels of government, the assertion and redefinition of local and community property and forest use rights, and the effects of the recent severe economic crisis. The country’s
decisive break with its past means that all these issues are simultaneously in play;
there is little history of incremental reform upon which to build.
Which Way Forward? brings together 26 authors contributing 16 essays. It also
contains introductory and concluding chapters, and an afterword by Emil Salim,
former Indonesian minister for population and the environment. The content was
written for the most part in 1999, in the immediate wake of Soeharto’s fall. The
authors are mainly social scientists and forest scientists, and the content strongly
reflects this disciplinary mix: politics, political and legal institutions, social organisation, and forest and timber industry policies all receive in-depth and carefully
contextualised treatments. The content is uniformly very well written and edited
for a non-technical readership. The index provides a helpful guide to subject matter, and a ‘timeline of significant legislation’ provides an important and very useful appendix.
Taken together, these essays document the precarious state of Indonesian forest policy in the aftermath of the collapse of an authoritarian, highly centralised
and often arbitrary state. Early chapters ably document the nature and effects of
New Order policies and processes codified, for the most part, in the 1967 Basic
Forestry Law (BFL). This established a legal and institutional framework for
state-supported commercial forest exploitation. Tensions between commercial/
industrial rights and those of communities over forest use were resolved in the
BFL by ‘categorically excluding’ forest communities and denying legitimacy to
adat (traditional law) (p. 215).
Laws passed in 1999 amended the BFL, while others in 2000 devolved substantive powers to local government. These initiatives mark the country’s first genuine attempt at decentralised forest management. They are deeply flawed,
however, as documented in several chapters. They are unclear on commercial
timber policies versus the rights of traditional forest communities, and ambivalent on state versus local powers and responsibilities. They are, moreover, laws
enacted in a transitional moment during which regional and village elites, freed
from the strictures of centralised New Order governance, began themselves to
initiate de facto decentralisation of local development policies. Lacking either a
strong (though arbitrary) central state or a clear set of rules for decentralised forest management, ‘policy implementation has depended to a great degree on personalities and place. The lack of certainty in the law, combined with the lack of a
legal structure linking the forest resource to its users, has created a free-for-all in
which forest management has become the responsibility of no-one’ (p. 24). Virtually the only certainty is that Indonesian timber removal rates, at about 80 million
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cubic metres per year, exceed even the government’s own ‘sustainability criterion’ by a factor of more than three (p. 216).
Questions about the way forward are clearly uppermost in the authors’ minds.
Chapters by Resosudarmo, Barr and Sunderlin all include clear analysis and sensible timber industry policy proposals, and identify tensions between incentives
and institutions for commercial exploitation, on one hand, and the rights and
responsibilities of traditional communities on the other. Further excellent contributions focus on village and local institutions for forest management, and on economic and legal factors contributing to the expansion of commercial agriculture
(particularly oil palm), which takes place largely at the expense of forest. A problem for all the authors, however, is that of the leap to a higher level of analytical
integration. On the set of forest policy issues that seem most clearly in need of
joint resolution—that is, rights to forests and norms for their sustainable use by
communities as well as firms—we are ultimately left with more questions than
clear normative direction. As a result, the set of questions posed at the end of
Resosudarmo’s chapter (p. 182) impart the troubling sense that a practical framework for integrated forest management remains elusive.
It is natural that a work of this scope and ambition should fall short in a few
areas. Bennett’s chapter on village governance relies on a more polemical style
laden with rhetorical flourishes that lengthen the text without adding much
meaning. Dudley’s chapter on illegal logging avoids the hard task of gathering
and examining data and is instead dominated by a sequence of incomprehensible
flow diagrams, poor substitutes for a clear, theory-driven analysis. There is a general tendency to eschew formal techniques for the examination of economic and
social data, as a consequence of which I recommend that this volume be read in
conjunction with the excellent and highly data-driven collection edited by Gérard
and Ruf (2001).
Overall, this is a rare and truly valuable set of essays documenting a historic
transition in a major developing nation. The authors show very clearly how the
past has brought Indonesian forest policy to its present crossroads, and give us an
excellent map of the surrounding policy and institutional landscape. But the
inescapable and depressing conclusion is that the solution to Indonesia’s complex
of forest problems remains uncharted territory. Which Way Forward? is right to
keep the question mark in its title.
Ian Coxhead
University of Wisconsin–Madison
Reference
Françoise Gérard and François Ruf (eds) (2001), Agriculture in Crisis: People, Commodities
and Natural Resources in Indonesia, 1996–2000, CIRAD, Montpellier, France; Curzon,
Richmond, UK.
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Nick J. Freeman (ed.) (2003), Financing Southeast Asia’s Economic Development,
Institute of Southeast Asian Studies, Singapore, pp. xvi + 372. Paper:
S$56.90/US$34.90.
This book is a welcome contribution to the literature on financing development
in Southeast Asia, although its coverage of Indonesia, Malaysia, Singapore, Thailand and the Philippines (the original five ASEAN nations) is much more complete than that of the other Southeast Asian countries. The 11 chapters and two
appendices are of quite widely varying length and quality, and cover most
aspects of financing development. Their discussion generally ends with 2001, and
emphasises the policy lessons learnt from the 1997 economic crisis.
Chapters 1, 2 and 10 deal with more macro issues, whereas the other chapters
are on specific types of finance. ‘External Financing under Financial Globalization: An East Asian Perspective’ by Akira Kohsaka (chapter 1), surveys patterns
and components of international capital flows to emerging markets, reviews policy lessons learnt from the financial crises in the 1990s, and pursues possible policy choices to address the fragilities associated with volatile capital flows to those
countries. It emphasises the need to find tailor-made prescriptions for individual
economies in the context of their own institutional infrastructure, and argues that
unconditional capital account liberalisation could be very dangerous. ‘Managing
the Debt Burden in Southeast Asia’, by Homi Kharas and Sudarshan Gooptu
(chapter 2), has an excellent discussion of the factors contributing to the increase
in public debt in seven ASEAN countries, and of sovereign debt management.
This, like the other chapters, uses no mathematical models, making it more accessible to general readers but resulting in less analytical rigour. Ngiam Kee Jin’s
chapter 10, ‘Regional Financial Integration in Southeast Asia’, discusses the financial integration policies of the original five ASEAN countries , the extent of their
financial integration, the arguments for and against financial integration among
ASEAN members, and the mechanisms to achieve it. He warns about the risk of
greater regional instability from increased regional financial integration, and lists
ways of lessening it.
The volume covers most types of finance other than taxation, Islamic finance
and small and medium enterprise finance. The long chapter 4, ‘The Challenges of
Microfinancing in Southeast Asia’ by John D. Conroy, contains excellent case
studies comparing seven countries (excluding Brunei, Singapore and Myanmar)
and is particularly good on Indonesia. It presents some worthy general guidelines for microfinance development, but makes little reference to the theoretical
literature. Unlike the others, this chapter contains a glossary of acronyms. There
is no discussion of the possibility that, even though it benefits the borrowers,
microcredit might result in little positive or even negative social benefit because
of external diseconomies created in saturated markets or overexploited commons.
Khalili Khalil’s short chapter 6, ‘Developing the Role of Venture Capital in
Southeast Asia’, demonstrates a deep understanding of the importance of venture
capital and factors affecting its supply, mainly in Malaysia. He recommends
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increasing the supply of venture capital through intensive training courses,
recruitment of analysts conversant with high technology, increased provision of
government incentives, an