00074910012331339033
Bulletin of Indonesian Economic Studies
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
Book Reviews
Jamie Mackie , H. W. Arndt , Graeme Dorrance & Peter van Diermen
To cite this article: Jamie Mackie , H. W. Arndt , Graeme Dorrance & Peter van Diermen (2000)
Book Reviews, Bulletin of Indonesian Economic Studies, 36:3, 137-145
To link to this article: http://dx.doi.org/10.1080/00074910012331339033
Published online: 18 Aug 2006.
Submit your article to this journal
Article views: 20
View related articles
Full Terms & Conditions of access and use can be found at
http://www.tandfonline.com/action/journalInformation?journalCode=cbie20
Download by: [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RA JA ALI HA JI
TANJUNGPINANG, KEPULAUAN RIAU]
Date: 19 January 2016, At: 22:07
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
Bulletin of Indonesian Economic Studies
Vol 36 No 3, December 2000, pp. 137–45
BOOK REVIEWS
Stephan Haggard (2000), The Political Economy of the Asian Financial Crisis,
Institute for International Economics, Washington DC, pp. xvii + 272.
This comprehensive and very thorough account of the Asian financial
crisis of 1997 and 1998, focused mainly on the four worst affected
countries—Thailand, South Korea, Malaysia and Indonesia—is an
example of ‘political economy’ at its best. It will be of value to students
of Indonesia’s economic policies also, for several reasons. First, it enables
us to see her experience of the crisis—its causes, course and outcomes—
in a comparative perspective alongside those of the other three, drawing
out the reasons why Indonesia has been hit so much harder than the
others (after a quite promising start), as well as the lessons to be drawn
from that. Second, by ‘bringing the politics back in’ it reveals the interplay
of political and economic factors in the decision making processes of each,
both at the onset of the crisis and in later policy responses to it. Third, it
gives useful summary accounts of the policies of the Soeharto and Habibie
governments during the crisis—although inevitably not much on the
current Wahid government—along with a convincing analysis of the
socio-economic and political dynamics behind them (and of policy in
the other three countries, plus briefer comments on those least affected
by the crisis: Singapore, Taiwan and the Philippines). Haggard’s depth
and breadth of understanding of both the domestic politics and economic
policies of all these countries is unrivalled, as also of the issues at stake
on the business–government relations side throughout the region,
especially in South Korea and Taiwan. But he is good on Indonesia too,
acknowledging collaboration with his UCSD (University of California,
San Diego) colleague Andrew MacIntyre in the several sections on that
country.
‘Most accounts by economists paid only passing attention to the way
politics contributed to the crisis’—and even less to its political
consequences, he remarks at the end of a brief survey of the debates
among economists about the causes of the crisis. They have provided
little systematic analysis of how the actions or inaction of governments
affected markets, or of the central role of politics in shaping the decision
making processes. Yet political uncertainty was a key factor at the
beginning of the crisis in several countries, especially Indonesia, while
patterns of business–government relations, strikingly different in all seven
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
138
Book Reviews
countries because of their political history and institutions, greatly affected
the capacity and inclination of governments to handle the adjustment
process in timely, coherent ways. Close relations between government
and the leading business groups may have been advantageous to
government policy making in some ways during the fast-growth decades
before the crisis, but they became an obstacle to adjustment after it,
because they gave rise to distortions of the liberalisation process, greater
vulnerability to shocks, and poor handling of moral hazard issues. Nondemocratic governments had no advantages over democratic ones in
coping with the crisis, he argues—contrary to the views of the ‘Asian
values’ and ‘strong government’ school, like Lee Kuan Yew—and in the
case of Indonesia and Malaysia they responded far less well. Haggard’s
analysis of Malaysia’s policy responses, in particular, was one of the best
I have yet seen.
Of the several sections dealing with Indonesia, I thought the best were
the account of how the July 1997 crisis led ultimately (but erratically) to
Soeharto’s downfall in May 1998—despite the fact that his initial handling
of it was ‘more decisive and coherent’ than in either Thailand, South
Korea or Malaysia—and the brief but perceptive account of the social
safety net policies attempted by the Habibie government in 1998–99. An
overview of corporate and financial restructuring measures in 1998–99
is useful, but almost too detailed, without adding much to what is already
well known. The section on the tensions between the political pressures
compelling Habibie towards demokrasi dan reformasi after Soeharto’s fall
and the constraints imposed on him by ‘his on-going links to privatesector groups that were critical to financing his political ambitions’ (and
to the still influential Soeharto-connected big-business interests fighting
for survival) is intriguing, but less illuminating than one might wish.
Haggard concludes that the political consequences of the crisis have
included not only major changes of government in three of the four worsthit countries, but also significant institutional, legal and policy changes
which are gradually transforming the financial systems and patterns of
business–government relations towards more open and competitive
arrangements. The basic political question for the future will be how to
restructure the relationship between the government and private sector—
more specifically, among the governments, banks, business firms and
other relevant stakeholders—in ways appropriate to a more democratic,
pluralistic and competitive politico-economic environment. Further, he
notes that government responses to the social hardships created by the
crisis were generally poor: a ‘new social contract’ needs to be worked
out if these countries are to get beyond the old Asian reliance on family
support for the victims of unemployment, famines and food shortages.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
Book Reviews
139
I have only three minor criticisms of this book. It is so densely packed,
so full of illuminating factual data and sheer good sense (a rare commodity
in the political economy game), backed by amazingly wide reading, that
the reader at times loses sight of the wood for the trees—although
Haggard’s underlying theoretical assumptions (basically institutionalist)
and policy recommendations are clear and explicit. There is almost
nothing on ‘the Chinese problem’ which is still central to all equity and
wealth distribution issues. And on Indonesia it ignores what I regard as
the fundamental structural problem facing any post-Soeharto
government, that of dismantling the tangled web of clientelist relations
and the essentially patrimonialist character of the New Order regime.
That has not yet changed significantly since Soeharto’s downfall, despite
the dramatic transformation from his strong, highly concentrated power
structure to a weak, increasingly dispersed distribution of both political
and economic power. There is a major story to be told there.
Jamie Mackie
ANU
Colin Barlow (ed.) (1999), Institutions and Economic Change in Southeast
Asia: The Context of Development from the 1960s to the 1990s, Edward Elgar,
Cheltenham, pp. xi + 204.
The idea of this book, as the editor explains in his Preface, arose in 1992
during a series of seminars at ANU, but took this shape only in 1997
when he brought together a band of eminent contributors.
The book addresses the role of institutions in the development of
Southeast Asia. The economic theory of institutional change is expounded
in an erudite chapter by Justin Lin. ‘An institution can be perceived as a
set of behavioural rules commonly observed by individuals in a society’
(p. 9). For example, ‘large modern hierarchical business enterprises
compete with markets as alternative institutions in coordinating
production and allocating resources’ (p. 8). This is followed by eight
chapters on institutions in individual Southeast Asian countries and a
final chapter, by David Vines, on global economic institutions from a
Southeast Asian perspective.
Three of the chapters on particular markets deal with Indonesia. The
first, by Barlow, treats smallholder rubber production in Sumatra as a
case study in institutional change, showing how new institutions in the
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
140
Book Reviews
form of private nurseries and smallholder projects have helped bridge
the gap between modern and traditional sectors. The second, by Manning,
deals with institutional change in the labour market in Java. Political
and social changes led to two quite different institutional arrangements,
those imposed by the state through controls over organised labour and
those induced by alterations in rural labour markets associated with the
green revolution. The third, by Hadi Soesastro, traces the evolution of
government institutions in Indonesia during the 30 years of the New
Order, with initial strengthening of the bureaucracy and centralised
economic management, followed by deregulation in the 1980s and
rampant cronyism in the 1990s. The chapter by Mackie on the role of
overseas Chinese entrepreneurship in Southeast Asia also has much of
interest on the Indonesian case.
While these four chapters will be of particular interest to readers of
BIES, those on Malaysia, Thailand, Vietnam and the Philippines are also
stimulating.
H.W. Arndt
ANU
Asian Policy Forum, Asian Development Bank Institute (Forum
Secretariat) (2000), Policy Recommendations for Preventing Another Capital
Account Crisis, Asian Development Bank Institute, Tokyo, pp. ii + 16.
Masaru Yoshitomi and Sayuri Shirai (2000), Technical Background Paper
for Policy Recommendations for Preventing Another Capital Account
Crisis, Asian Development Bank Institute, Tokyo, pp. ii + 85.
The recommendations in this Report and the Technical Background Paper1
are based on the opinion that the Asian crisis was ‘a capital account crisis,
distinct from a conventional current account crisis’. It is claimed that the
macroeconomic fundamentals were ‘inherently sound’, and that
‘corruption was not an obvious feature of Asia, and cronyism itself could
not account for the timing or location of the Asian crisis’. Indonesia’s
and others’ ‘high index of corruption … high concentration of asset
ownership … low rule-of-law score and … weak creditor-oriented
insolvency procedures’ (Djiwandono 2000) are considered to be irrelevant.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
Book Reviews
141
An earlier ADB Institute Report held the more tenable view that the
crisis arose largely because ‘financial intermediaries … (were) … not
always free to use business criteria in allocating credit as well connected
borrowers could not be refused credit that was frequently granted with
implicit or explicit government guarantees’ (Moreno et al. 1998).
By the end of 1996, at the latest, it should have been clear that a
conventional crisis was imminent. Massive short-term capital inflows
that could not be offset by monetary authority stabilisation induced
monetary institutions to expand domestic credit at rates well beyond the
increases in output, and at multiples of the rates in other progressive
countries. This credit expansion was almost certain to create expenditure
in excess of production, with the consequent balance of payments crisis.
The Technical Background Paper rejects a freely floating exchange
rate and favours the adoption of a narrow band within which the rate
floats, but does not discuss variations of the band.
For many years, The Netherlands set the daily mid $/guilder rate at
the previous day’s closing rate, and the Netherlands Bank intervened if
the market-determined rate moved more than 1% from that value. This
policy ensured that the rate reflected underlying economic influences,
but was isolated from the temporary effects of large individual
transactions. A system such as this might be considered by countries in
Southeast Asia, searching for exchange rate stability with flexibility.
The Report accepts the irrational IMF-endorsed principle that the
reference basket for the exchange rate of a country’s currency should be
based on the currencies of the countries with which it trades commodities.
Commodity trade accounts for less than one-half of international
transactions. There is no reason to expect that transactions on services,
income, and capital accounts will have the same currency of settlement
pattern as trade in commodities. Many commodity transactions are settled
in the currencies of price quotation, rather than in those of the countries
of provenance and destination. With the importance of major countries
in Asian trade, it might be more reasonable to suggest the SDR (Special
Drawing Rights) rather than a trade-weighted basket as a reference
benchmark.
The withdrawals of short-tem capital were the most dramatic events
of the second half of 1977. The Report proposes that, if capital inflows
threaten monetary management, unremunerated reserve requirements
or minimum holding periods should be applied to such liabilities. This
is a superior recommendation to the prohibition of movements.
Prohibiting some flows will inhibit others, with the consequent
deprivation to the economy of the benefits of access to international
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
142
Book Reviews
markets. To prevent disequilibrating capital movements, it is more
important that ‘sound macroeconomic performance is sustained and fiscal
policy is supportive’, than to engage in discriminatory controls.
The valid criticism of East Asia’s economic structures (Djiwandono
2000; Moreno et al. 1998) gives weight to the view that Asian countries
‘should adopt … best practice in prudential regulation and supervision’
of financial and other institutions. The Report refrains from making
specific recommendations and the Background Paper is vague. The IMF’s
53 macroprudential indicators, which do not include the level of inflation
(Hilbers et al. 2000), are too long a list of items for a country strengthening
a weak system. A set of requirements probably based on, but not detailed
duplicates of, the ‘Basle standards’ might be adopted for all financial
institutions. The development of, and required adherence to, such
standards would not only reduce the likelihood of financial crises, but
also probably increase the efficiency of those receiving credit.
‘Sound, liquid domestic capital markets’ are desirable institutions in
all countries. Stock exchanges are useful in countries where many families
have annual incomes equivalent to $100,000–250,000, but it does not
follow that they should be encouraged as repositories for private savings
where typical incomes are much lower. Unless a family can accumulate
large enough holdings of a wide range of securities to avoid the relatively
large costs of individual transactions, the desirable liquidity of their asset
holdings will almost certainly be subject to continued stock exchange
volatility. For most families, financial protection is better preserved in
holdings of insurance, retirement policies and mutual funds.
Acceptance of the Report’s encouragement of bond finance would
introduce an element of rigidity to financial flows in economies that are
likely to be more subject to fluctuations than high-income ones. The
essence of the Modigliani–Miller theorem (Modigliani and Miller 1961)
is that, contrary to the Background Paper’s statement, bonds do not reduce
the total effective cost of finance.
The tradition of IMF or other finance converting private debt to
sovereign debt has created moral hazard in international financing.
Proposals, as in the Report, to ‘bail in’ private creditors would alleviate
this weakness in present traditions. They would ‘raise the cost of future
loan contracts’. If the IMF were to declare that it would only finance crises
for countries that had observed its conditionality, and verify this stand
by publicly rejecting applications for assistance in cases where
conditionality had not been observed, crises would be much less frequent.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
Book Reviews
143
The Report supports present restrictions on non-resident holdings of
domestic currencies. The maintainence of sound macroeconomic (defined
as covering the complete range of) policies will do more to avert the
speculative dangers of such holdings than any prohibitions.
As the Report assumes that Asian crises are ‘different from …
conventional current account crises’, it recommends that a Regional
Financial Arrangement (RFA) should be established ‘that would provide
a lender of last resort facility … immediately … available for the
requesting economy’. As the assumption supporting this
recommendation is questionable, it follows that there is little logical
support for it.
Graeme Dorrance
Sydney
Notes
1
The Technical Background Paper refers to most of the literature on the
1997–98 crisis, but fails to refer to articles in this Bulletin.
References
Djiwandono, J. Soedradjad (2000), ‘Bank Indonesia and the Recent Crisis’, Bulletin
of Indonesian Economic Studies 36 (1): 47–72.
Hilbers, Paul, Russell Krueger and Marina Moretti (2000), ‘New Tools for Assessing
Financial System Soundness’, Finance and Development 37 (3), International
Monetary Fund, Washington DC.
Modigliani, Franco, and Merton Miller (1961), ‘Dividend Policy, Growth, and the
Valuation of Shares’, Journal of Business 34.
Moreno, R., G. Pasadilla, and E. Remolona (1998), ‘Asia’s Financial Crisis: Lessons
and Policy Responses’, in R. Moreno and G. Pasadilla (eds), Asia: Responding
to Crisis, ADB Institute, Manila: 1–27.
Marieke Kragten (2000), Viable or Marginal? Small-scale Industries in Rural
Java (Bantul District), Royal Dutch Acadamy of Sciences and Faculty of
Geographical Sciences, Utrecht University, Utrecht, pp. 197.
This book continues the Dutch tradition of publishing students’ PhD
theses in-house, and it joins a growing list of published PhDs from the
Netherlands on Indonesia’s small-scale industries. This list includes work
by Klapwijk (1997), Sandee (1995) and Tambunan (1994). The book under
review, like its predecessors, provides the reader with a rich account of
rural small-scale industries. The study is located in the Bantul district,
just south of Yogyakarta—a densely populated region with a significant
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
144
Book Reviews
number of small-scale rural-based industries. In producing this book,
Kragten spent several years investigating the ‘main factors conditioning
rural diversification and industrialization’ and attempting ‘to clarify the
role of industrial activity in the household economy’ (p. 14). Her findings,
interestingly, do not always conform to what would be expected from
the existing literature. Moreover, she has not adjusted her hypotheses to
fit with her findings, and readily and refreshingly admits that the findings
do not support several of her hypotheses.
The book is divided into seven chapters, with a separate introduction
that identifies the work as part of a much wider joint project between
Gadjah Mada University and Utrecht University on rural and regional
development planning. As is traditional with this kind of publication,
the book also includes a short abstract in Dutch. The general structure of
the volume follows very much that of a thesis, with a literature review
and background chapter presented first, followed by the case study
chapters and analysis. An interesting technique is the use of a series of
related questions at the beginning of each chapter—this works well.
The introduction presents the book’s theme and sets out the objectives,
concepts and methodology, as well as briefly outlining each of the
chapters. Chapter 1 covers the literature on rural diversification and
industrialisation. From the literature, the author identifies three forms of
rural industrialisation. The first type is ‘supply-push labour’, which
occurs in response to excess labour in the agricultural sector. Second,
increasing manufacturing productivity leads to demand-pull
industrialisation, often associated with agricultural processing industries.
Finally, non-agricultural associated industrialisation occurs in response
to niche market opportunities. The second and third categories are found
to be more viable.
Chapter 2 provides the obligatory background information on rural
diversification and industrialisation in Java, while chapter 3 gives a
detailed description of the Bantul district. Together, they present an
extremely good coverage of the region’s economy. Maps are liberally used
to illustrate the distribution of land use, income and several other socioeconomic variables.
Chapters 4 and 5 present the findings of the fieldwork. Detailed
industry surveys were conducted in four villages; their results are
presented in chapter 4. Major findings included the following: most of
the industrial activity was driven by ‘supply-push labour’; rural industrial
activity made a major contribution to local income and employment; there
were few linkages with the agricultural sector; and the importance of the
rural industries and their characteristics varied greatly among the four
villages.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
Book Reviews
145
Chapter 5 focuses on specific industrial clusters within the district.
These were found to be more dynamic than the dispersed industries
surveyed in the previous chapter. None of the clusters represented the
type of new industrial organisation often referred to as ‘flexible
specialisation’ and found in Europe. However, clusters did provide
entrepreneurs with information and access to a large pool of labour, and
to supplier networks.
Chapter 6 provides a discussion of some of the key findings. Among
these were, not surprisingly, that the extensive government programs
for clusters and small-scale industry had been of limited use. Second,
location and historical development were important variables explaining
rural industrial development. For example, villages with a long history
in handicrafts were more likely to develop into clusters of small-scale
industrial activity. The great variation between locations was also heavily
influenced by the availability of cheap skilled labour, by access to
information, and by the existence of successful entrepreneurs who acted
as exemplars.
This book represents a detailed discussion of a very specific topic
and location, and should appeal to readers interested in Indonesia, rural
diversification, and small-scale industries. It makes a valuable
contribution to the literature, complementing earlier work by other Dutch
scholars.
Peter van Diermen
ANU
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
Book Reviews
Jamie Mackie , H. W. Arndt , Graeme Dorrance & Peter van Diermen
To cite this article: Jamie Mackie , H. W. Arndt , Graeme Dorrance & Peter van Diermen (2000)
Book Reviews, Bulletin of Indonesian Economic Studies, 36:3, 137-145
To link to this article: http://dx.doi.org/10.1080/00074910012331339033
Published online: 18 Aug 2006.
Submit your article to this journal
Article views: 20
View related articles
Full Terms & Conditions of access and use can be found at
http://www.tandfonline.com/action/journalInformation?journalCode=cbie20
Download by: [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RA JA ALI HA JI
TANJUNGPINANG, KEPULAUAN RIAU]
Date: 19 January 2016, At: 22:07
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
Bulletin of Indonesian Economic Studies
Vol 36 No 3, December 2000, pp. 137–45
BOOK REVIEWS
Stephan Haggard (2000), The Political Economy of the Asian Financial Crisis,
Institute for International Economics, Washington DC, pp. xvii + 272.
This comprehensive and very thorough account of the Asian financial
crisis of 1997 and 1998, focused mainly on the four worst affected
countries—Thailand, South Korea, Malaysia and Indonesia—is an
example of ‘political economy’ at its best. It will be of value to students
of Indonesia’s economic policies also, for several reasons. First, it enables
us to see her experience of the crisis—its causes, course and outcomes—
in a comparative perspective alongside those of the other three, drawing
out the reasons why Indonesia has been hit so much harder than the
others (after a quite promising start), as well as the lessons to be drawn
from that. Second, by ‘bringing the politics back in’ it reveals the interplay
of political and economic factors in the decision making processes of each,
both at the onset of the crisis and in later policy responses to it. Third, it
gives useful summary accounts of the policies of the Soeharto and Habibie
governments during the crisis—although inevitably not much on the
current Wahid government—along with a convincing analysis of the
socio-economic and political dynamics behind them (and of policy in
the other three countries, plus briefer comments on those least affected
by the crisis: Singapore, Taiwan and the Philippines). Haggard’s depth
and breadth of understanding of both the domestic politics and economic
policies of all these countries is unrivalled, as also of the issues at stake
on the business–government relations side throughout the region,
especially in South Korea and Taiwan. But he is good on Indonesia too,
acknowledging collaboration with his UCSD (University of California,
San Diego) colleague Andrew MacIntyre in the several sections on that
country.
‘Most accounts by economists paid only passing attention to the way
politics contributed to the crisis’—and even less to its political
consequences, he remarks at the end of a brief survey of the debates
among economists about the causes of the crisis. They have provided
little systematic analysis of how the actions or inaction of governments
affected markets, or of the central role of politics in shaping the decision
making processes. Yet political uncertainty was a key factor at the
beginning of the crisis in several countries, especially Indonesia, while
patterns of business–government relations, strikingly different in all seven
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
138
Book Reviews
countries because of their political history and institutions, greatly affected
the capacity and inclination of governments to handle the adjustment
process in timely, coherent ways. Close relations between government
and the leading business groups may have been advantageous to
government policy making in some ways during the fast-growth decades
before the crisis, but they became an obstacle to adjustment after it,
because they gave rise to distortions of the liberalisation process, greater
vulnerability to shocks, and poor handling of moral hazard issues. Nondemocratic governments had no advantages over democratic ones in
coping with the crisis, he argues—contrary to the views of the ‘Asian
values’ and ‘strong government’ school, like Lee Kuan Yew—and in the
case of Indonesia and Malaysia they responded far less well. Haggard’s
analysis of Malaysia’s policy responses, in particular, was one of the best
I have yet seen.
Of the several sections dealing with Indonesia, I thought the best were
the account of how the July 1997 crisis led ultimately (but erratically) to
Soeharto’s downfall in May 1998—despite the fact that his initial handling
of it was ‘more decisive and coherent’ than in either Thailand, South
Korea or Malaysia—and the brief but perceptive account of the social
safety net policies attempted by the Habibie government in 1998–99. An
overview of corporate and financial restructuring measures in 1998–99
is useful, but almost too detailed, without adding much to what is already
well known. The section on the tensions between the political pressures
compelling Habibie towards demokrasi dan reformasi after Soeharto’s fall
and the constraints imposed on him by ‘his on-going links to privatesector groups that were critical to financing his political ambitions’ (and
to the still influential Soeharto-connected big-business interests fighting
for survival) is intriguing, but less illuminating than one might wish.
Haggard concludes that the political consequences of the crisis have
included not only major changes of government in three of the four worsthit countries, but also significant institutional, legal and policy changes
which are gradually transforming the financial systems and patterns of
business–government relations towards more open and competitive
arrangements. The basic political question for the future will be how to
restructure the relationship between the government and private sector—
more specifically, among the governments, banks, business firms and
other relevant stakeholders—in ways appropriate to a more democratic,
pluralistic and competitive politico-economic environment. Further, he
notes that government responses to the social hardships created by the
crisis were generally poor: a ‘new social contract’ needs to be worked
out if these countries are to get beyond the old Asian reliance on family
support for the victims of unemployment, famines and food shortages.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
Book Reviews
139
I have only three minor criticisms of this book. It is so densely packed,
so full of illuminating factual data and sheer good sense (a rare commodity
in the political economy game), backed by amazingly wide reading, that
the reader at times loses sight of the wood for the trees—although
Haggard’s underlying theoretical assumptions (basically institutionalist)
and policy recommendations are clear and explicit. There is almost
nothing on ‘the Chinese problem’ which is still central to all equity and
wealth distribution issues. And on Indonesia it ignores what I regard as
the fundamental structural problem facing any post-Soeharto
government, that of dismantling the tangled web of clientelist relations
and the essentially patrimonialist character of the New Order regime.
That has not yet changed significantly since Soeharto’s downfall, despite
the dramatic transformation from his strong, highly concentrated power
structure to a weak, increasingly dispersed distribution of both political
and economic power. There is a major story to be told there.
Jamie Mackie
ANU
Colin Barlow (ed.) (1999), Institutions and Economic Change in Southeast
Asia: The Context of Development from the 1960s to the 1990s, Edward Elgar,
Cheltenham, pp. xi + 204.
The idea of this book, as the editor explains in his Preface, arose in 1992
during a series of seminars at ANU, but took this shape only in 1997
when he brought together a band of eminent contributors.
The book addresses the role of institutions in the development of
Southeast Asia. The economic theory of institutional change is expounded
in an erudite chapter by Justin Lin. ‘An institution can be perceived as a
set of behavioural rules commonly observed by individuals in a society’
(p. 9). For example, ‘large modern hierarchical business enterprises
compete with markets as alternative institutions in coordinating
production and allocating resources’ (p. 8). This is followed by eight
chapters on institutions in individual Southeast Asian countries and a
final chapter, by David Vines, on global economic institutions from a
Southeast Asian perspective.
Three of the chapters on particular markets deal with Indonesia. The
first, by Barlow, treats smallholder rubber production in Sumatra as a
case study in institutional change, showing how new institutions in the
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
140
Book Reviews
form of private nurseries and smallholder projects have helped bridge
the gap between modern and traditional sectors. The second, by Manning,
deals with institutional change in the labour market in Java. Political
and social changes led to two quite different institutional arrangements,
those imposed by the state through controls over organised labour and
those induced by alterations in rural labour markets associated with the
green revolution. The third, by Hadi Soesastro, traces the evolution of
government institutions in Indonesia during the 30 years of the New
Order, with initial strengthening of the bureaucracy and centralised
economic management, followed by deregulation in the 1980s and
rampant cronyism in the 1990s. The chapter by Mackie on the role of
overseas Chinese entrepreneurship in Southeast Asia also has much of
interest on the Indonesian case.
While these four chapters will be of particular interest to readers of
BIES, those on Malaysia, Thailand, Vietnam and the Philippines are also
stimulating.
H.W. Arndt
ANU
Asian Policy Forum, Asian Development Bank Institute (Forum
Secretariat) (2000), Policy Recommendations for Preventing Another Capital
Account Crisis, Asian Development Bank Institute, Tokyo, pp. ii + 16.
Masaru Yoshitomi and Sayuri Shirai (2000), Technical Background Paper
for Policy Recommendations for Preventing Another Capital Account
Crisis, Asian Development Bank Institute, Tokyo, pp. ii + 85.
The recommendations in this Report and the Technical Background Paper1
are based on the opinion that the Asian crisis was ‘a capital account crisis,
distinct from a conventional current account crisis’. It is claimed that the
macroeconomic fundamentals were ‘inherently sound’, and that
‘corruption was not an obvious feature of Asia, and cronyism itself could
not account for the timing or location of the Asian crisis’. Indonesia’s
and others’ ‘high index of corruption … high concentration of asset
ownership … low rule-of-law score and … weak creditor-oriented
insolvency procedures’ (Djiwandono 2000) are considered to be irrelevant.
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An earlier ADB Institute Report held the more tenable view that the
crisis arose largely because ‘financial intermediaries … (were) … not
always free to use business criteria in allocating credit as well connected
borrowers could not be refused credit that was frequently granted with
implicit or explicit government guarantees’ (Moreno et al. 1998).
By the end of 1996, at the latest, it should have been clear that a
conventional crisis was imminent. Massive short-term capital inflows
that could not be offset by monetary authority stabilisation induced
monetary institutions to expand domestic credit at rates well beyond the
increases in output, and at multiples of the rates in other progressive
countries. This credit expansion was almost certain to create expenditure
in excess of production, with the consequent balance of payments crisis.
The Technical Background Paper rejects a freely floating exchange
rate and favours the adoption of a narrow band within which the rate
floats, but does not discuss variations of the band.
For many years, The Netherlands set the daily mid $/guilder rate at
the previous day’s closing rate, and the Netherlands Bank intervened if
the market-determined rate moved more than 1% from that value. This
policy ensured that the rate reflected underlying economic influences,
but was isolated from the temporary effects of large individual
transactions. A system such as this might be considered by countries in
Southeast Asia, searching for exchange rate stability with flexibility.
The Report accepts the irrational IMF-endorsed principle that the
reference basket for the exchange rate of a country’s currency should be
based on the currencies of the countries with which it trades commodities.
Commodity trade accounts for less than one-half of international
transactions. There is no reason to expect that transactions on services,
income, and capital accounts will have the same currency of settlement
pattern as trade in commodities. Many commodity transactions are settled
in the currencies of price quotation, rather than in those of the countries
of provenance and destination. With the importance of major countries
in Asian trade, it might be more reasonable to suggest the SDR (Special
Drawing Rights) rather than a trade-weighted basket as a reference
benchmark.
The withdrawals of short-tem capital were the most dramatic events
of the second half of 1977. The Report proposes that, if capital inflows
threaten monetary management, unremunerated reserve requirements
or minimum holding periods should be applied to such liabilities. This
is a superior recommendation to the prohibition of movements.
Prohibiting some flows will inhibit others, with the consequent
deprivation to the economy of the benefits of access to international
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markets. To prevent disequilibrating capital movements, it is more
important that ‘sound macroeconomic performance is sustained and fiscal
policy is supportive’, than to engage in discriminatory controls.
The valid criticism of East Asia’s economic structures (Djiwandono
2000; Moreno et al. 1998) gives weight to the view that Asian countries
‘should adopt … best practice in prudential regulation and supervision’
of financial and other institutions. The Report refrains from making
specific recommendations and the Background Paper is vague. The IMF’s
53 macroprudential indicators, which do not include the level of inflation
(Hilbers et al. 2000), are too long a list of items for a country strengthening
a weak system. A set of requirements probably based on, but not detailed
duplicates of, the ‘Basle standards’ might be adopted for all financial
institutions. The development of, and required adherence to, such
standards would not only reduce the likelihood of financial crises, but
also probably increase the efficiency of those receiving credit.
‘Sound, liquid domestic capital markets’ are desirable institutions in
all countries. Stock exchanges are useful in countries where many families
have annual incomes equivalent to $100,000–250,000, but it does not
follow that they should be encouraged as repositories for private savings
where typical incomes are much lower. Unless a family can accumulate
large enough holdings of a wide range of securities to avoid the relatively
large costs of individual transactions, the desirable liquidity of their asset
holdings will almost certainly be subject to continued stock exchange
volatility. For most families, financial protection is better preserved in
holdings of insurance, retirement policies and mutual funds.
Acceptance of the Report’s encouragement of bond finance would
introduce an element of rigidity to financial flows in economies that are
likely to be more subject to fluctuations than high-income ones. The
essence of the Modigliani–Miller theorem (Modigliani and Miller 1961)
is that, contrary to the Background Paper’s statement, bonds do not reduce
the total effective cost of finance.
The tradition of IMF or other finance converting private debt to
sovereign debt has created moral hazard in international financing.
Proposals, as in the Report, to ‘bail in’ private creditors would alleviate
this weakness in present traditions. They would ‘raise the cost of future
loan contracts’. If the IMF were to declare that it would only finance crises
for countries that had observed its conditionality, and verify this stand
by publicly rejecting applications for assistance in cases where
conditionality had not been observed, crises would be much less frequent.
y [Universitas Maritim Raja Ali Haji], [UNIVERSITAS MARITIM RAJA ALI HAJI TANJUNGPINANG, KEPULAUAN RIAU] at 22:07 19
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The Report supports present restrictions on non-resident holdings of
domestic currencies. The maintainence of sound macroeconomic (defined
as covering the complete range of) policies will do more to avert the
speculative dangers of such holdings than any prohibitions.
As the Report assumes that Asian crises are ‘different from …
conventional current account crises’, it recommends that a Regional
Financial Arrangement (RFA) should be established ‘that would provide
a lender of last resort facility … immediately … available for the
requesting economy’. As the assumption supporting this
recommendation is questionable, it follows that there is little logical
support for it.
Graeme Dorrance
Sydney
Notes
1
The Technical Background Paper refers to most of the literature on the
1997–98 crisis, but fails to refer to articles in this Bulletin.
References
Djiwandono, J. Soedradjad (2000), ‘Bank Indonesia and the Recent Crisis’, Bulletin
of Indonesian Economic Studies 36 (1): 47–72.
Hilbers, Paul, Russell Krueger and Marina Moretti (2000), ‘New Tools for Assessing
Financial System Soundness’, Finance and Development 37 (3), International
Monetary Fund, Washington DC.
Modigliani, Franco, and Merton Miller (1961), ‘Dividend Policy, Growth, and the
Valuation of Shares’, Journal of Business 34.
Moreno, R., G. Pasadilla, and E. Remolona (1998), ‘Asia’s Financial Crisis: Lessons
and Policy Responses’, in R. Moreno and G. Pasadilla (eds), Asia: Responding
to Crisis, ADB Institute, Manila: 1–27.
Marieke Kragten (2000), Viable or Marginal? Small-scale Industries in Rural
Java (Bantul District), Royal Dutch Acadamy of Sciences and Faculty of
Geographical Sciences, Utrecht University, Utrecht, pp. 197.
This book continues the Dutch tradition of publishing students’ PhD
theses in-house, and it joins a growing list of published PhDs from the
Netherlands on Indonesia’s small-scale industries. This list includes work
by Klapwijk (1997), Sandee (1995) and Tambunan (1994). The book under
review, like its predecessors, provides the reader with a rich account of
rural small-scale industries. The study is located in the Bantul district,
just south of Yogyakarta—a densely populated region with a significant
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number of small-scale rural-based industries. In producing this book,
Kragten spent several years investigating the ‘main factors conditioning
rural diversification and industrialization’ and attempting ‘to clarify the
role of industrial activity in the household economy’ (p. 14). Her findings,
interestingly, do not always conform to what would be expected from
the existing literature. Moreover, she has not adjusted her hypotheses to
fit with her findings, and readily and refreshingly admits that the findings
do not support several of her hypotheses.
The book is divided into seven chapters, with a separate introduction
that identifies the work as part of a much wider joint project between
Gadjah Mada University and Utrecht University on rural and regional
development planning. As is traditional with this kind of publication,
the book also includes a short abstract in Dutch. The general structure of
the volume follows very much that of a thesis, with a literature review
and background chapter presented first, followed by the case study
chapters and analysis. An interesting technique is the use of a series of
related questions at the beginning of each chapter—this works well.
The introduction presents the book’s theme and sets out the objectives,
concepts and methodology, as well as briefly outlining each of the
chapters. Chapter 1 covers the literature on rural diversification and
industrialisation. From the literature, the author identifies three forms of
rural industrialisation. The first type is ‘supply-push labour’, which
occurs in response to excess labour in the agricultural sector. Second,
increasing manufacturing productivity leads to demand-pull
industrialisation, often associated with agricultural processing industries.
Finally, non-agricultural associated industrialisation occurs in response
to niche market opportunities. The second and third categories are found
to be more viable.
Chapter 2 provides the obligatory background information on rural
diversification and industrialisation in Java, while chapter 3 gives a
detailed description of the Bantul district. Together, they present an
extremely good coverage of the region’s economy. Maps are liberally used
to illustrate the distribution of land use, income and several other socioeconomic variables.
Chapters 4 and 5 present the findings of the fieldwork. Detailed
industry surveys were conducted in four villages; their results are
presented in chapter 4. Major findings included the following: most of
the industrial activity was driven by ‘supply-push labour’; rural industrial
activity made a major contribution to local income and employment; there
were few linkages with the agricultural sector; and the importance of the
rural industries and their characteristics varied greatly among the four
villages.
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Chapter 5 focuses on specific industrial clusters within the district.
These were found to be more dynamic than the dispersed industries
surveyed in the previous chapter. None of the clusters represented the
type of new industrial organisation often referred to as ‘flexible
specialisation’ and found in Europe. However, clusters did provide
entrepreneurs with information and access to a large pool of labour, and
to supplier networks.
Chapter 6 provides a discussion of some of the key findings. Among
these were, not surprisingly, that the extensive government programs
for clusters and small-scale industry had been of limited use. Second,
location and historical development were important variables explaining
rural industrial development. For example, villages with a long history
in handicrafts were more likely to develop into clusters of small-scale
industrial activity. The great variation between locations was also heavily
influenced by the availability of cheap skilled labour, by access to
information, and by the existence of successful entrepreneurs who acted
as exemplars.
This book represents a detailed discussion of a very specific topic
and location, and should appeal to readers interested in Indonesia, rural
diversification, and small-scale industries. It makes a valuable
contribution to the literature, complementing earlier work by other Dutch
scholars.
Peter van Diermen
ANU