Manajemen | Fakultas Ekonomi Universitas Maritim Raja Ali Haji 000749102320145084
Bulletin of Indonesian Economic Studies
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To cite this article: (2002) BOOK REVIEWS, Bulletin of Indonesian Economic Studies, 38:2,
251-264, DOI: 10.1080/000749102320145084
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Bulletin of Indonesian Economic Studies, Vol. 38, No. 2, 2002: 251–64
BOOK REVIEWS
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Tim Lindsey and Howard Dick (2002), Corruption in Asia: Rethinking the Good Governance Paradigm, Federation Press, Sydney, pp. 240. Paper: A$55.00.
‘Governance’ has become a prominent
buzzword among development theorists
and the international aid community in
recent years. Alternative critiques of development theory and bureaucracies
have long argued that we cannot understand how nations become wealthy using abstract economic models that do not
take account of social realities such as
class and power relationships and the
historical legacy of state institutions.
Many of the matters raised (if not the
conclusions reached) by these critiques
have been adopted into the thinking and
practice of international development
agencies. This has included the inner
policy sanctums of the World Bank and,
to a lesser extent, the IMF. The Asian economic crisis of 1997–98, with the sudden end to growth in countries that
seemed to have ‘got the policies right’,
was instrumental in strengthening
doubts about the sufficiency of GDP
growth in itself to provide for both prosperity and democratisation. The appearance immediately before the crisis of the
World Bank’s report on the role of the
state showed that this rethinking also
had a longer pedigree, particularly under Bank president James Wolfensohn.
Nevertheless, the editors of the collection under review, Tim Lindsey and
Howard Dick, argue that notions of governance and corruption are still ‘under-
theorised’, leading to ‘definitional confusion, fuzzy policy, flawed projects and
ineffectual reforms’. Just as earlier aid to
‘the economy’ was wasted because it ignored political realities, so governance
programs often act as if they can avoid
confronting vested power structures. In
Dick’s words, ‘institutional reform is not
a politically disembodied “quick fix”’.
As a contribution to overcoming this
posited paucity of theory, the volume
endeavours to establish some frameworks to examine the categories of governance, corruption and legal reform,
and to test those frameworks in the cases
of Indonesia and Vietnam, and in a comparative piece on former Soviet-bloc Europe. Kanishka Jayasuriya identifies the
new prominence of governance as part
of a ‘post-Washington consensus’, which
he sees as retaining key elements of the
old Washington consensus of open markets, liberalisation and structural adjustment. In particular, the new consensus
retains an instrumentalist attitude to
‘politics as the effective implementation
of agreed technical procedures’ rather
than as an arena of conflict, bargaining
and compromise. Lindsey also sees more
continuities than discontinuities in the
apparently new thinking on governance,
and concludes that ‘there is little reason
to believe that the lessons of the 1970s
have been learnt’. Dick argues for a
ISSN 0007-4918 print/ISSN 1472-7234 online/02/020251-14
© 2002 Indonesia Project ANU
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252
deconstruction of the terms ‘governance’
and ‘corruption’, which he says would
reveal their political (rather than technocratic) intent as part of the ‘neo-liberal
reform agenda promoted by the IMF and
the World Bank’.
The more theoretical articles in this
collection thus introduce a strong critique
of the notion of ‘good governance’, arguing that the idea fails to take account of
the political nature of economic development, while at the same time being suffused with its own political agenda. The
promise that the critique will be tested by
the other authors is not really fulfilled,
however. As in most multi-authored collections, the contributions vary in quality and reflect the differing interests and
backgrounds of the contributors. While
all provide good insights into corruption
and legal reform in their respective subject countries, few explicitly come to grips
with the issues raised in the theoretical
critique.
Gary Goodpaster, for example, provides a very useful description of the
nature and characteristics of corruption
in Indonesia. But his only reference to
the critical theses of the collection is to
reject them, suggesting merely that the
problem is ‘donor impatience’. He concludes that IMF/World Bank conditionality does have a long-term effect
in forcing reluctant governments to reform. Other articles, particularly those
on the reform of legal and judicial in-
Book Reviews
stitutions and the creation of anti-corruption agencies, implicitly or explicitly highlight the political difficulties
of overcoming the resistance of powerful vested interests. But none of this
would surprise any international donor official with a good knowledge of
his or her posting.
What the book does achieve is to provide excellent theoretical and empirical
material for rethinking the governance
paradigm and, by extension, the role of
international financial and development
institutions. It is a timely contribution to
a debate that must be had. The paradox,
however, is that those best placed to do
the rethinking are dependent on the very
institutions they would seek to change.
As the editors point out, ‘jobs are being
created and good consultancy rates are
being paid in this new branch of the development industry’, whatever the efficacy of aid for good governance. Foreign
assistance programs will chug along regardless, in response to their own diplomatic and bureaucratic imperatives:
relationships maintained and budgets
expended. This collection calls for a
pause for thought, to start a dialogue ‘between the world as it is and the world of
ideals’, without which all the dollars
outlaid will have little effect.
Stephen Sherlock
Information and Research Services
Parliament of Australia
Book Reviews
253
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R.E. Elson (2001), Suharto: A Political Biography, Cambridge University Press, Cambridge and Melbourne, pp. xxi + 389. Cloth: A$59.95.
President Suharto’s crucial role in the
transformation of Indonesia from an economic basket case in 1965–66 to ‘Asian
Tiger’ status in the early 1990s is reasonably well understood in terms of broad
economic policy. But the mind and motivations of the man himself have always
been something of a puzzle. And the reasons for his later slide from predominantly
successful economic policies during his
first 20 years towards the fatal aberrations
of the mid 1990s are still shrouded in
mystery at a deeper personal level.
Elson tells the story of Suharto’s life
superbly in this authoritative and very
readable biography. It will long remain
essential reading for any student of the
New Order and its political dynamics, of
value also for hard-nosed economists
searching for theoretical explanations of
the miracle Suharto wrought. ‘Suharto
was born into a poor peasant family’, he
writes, ‘but he presided over his country’s
industrial transformation and is thought
by many to control a family fortune worth
billions of dollars. Such paradox is a key
motif of his life; together with his public
mask and evasive, undemonstrative manner, it makes the task of attempting to understand the man elusive in the extreme.’
The great strength of this biography is
the way Elson traces how Suharto responded so successfully to the diverse
challenges and frequently changing circumstances he had to face at different
phases of his life, gaining increased confidence—and eventual hubris—in each
of them. The five chapters dealing with
the years up to 1965 are especially illuminating, while in the next five the various phases of his 30 years as president
are all deftly analysed. Elson’s interpretation of the controversial 1965 Gestapu
coup and Suharto’s handling of it seemed
to me a balanced and broadly convincing one. His account of how Suharto then
consolidated his grip on state power and
began to shape the New Order regime
between 1966 and 1971 is masterly, as is
the story of how his relations with the
Army top brass changed between 1982
and 1993, almost imperceptibly but fatefully for Indonesia’s future.
The key parts played by Widjojo,
Sadli, Ali Wardhana and the other technocrats in shaping the economic policies tha t und erpinned Ind onesia ’s
‘economic miracle’ are well described
(but briefly, and are perhaps a shade too
understated) as also are their roles in
helping to educate Suharto in the rudiments of economics in the early years of
his presidency. It is a pity that the decline in their influence in his later years
had to be dealt with so briefly, when
good times led to bad policies, enabling
crony capitalism and nepotism to take
over disastrously. ‘The technocrats
made enormous efforts to shape a new
economic landscape, but were unable to
alter fundamentally the socio-political
context governing the [political] environment … What emerged was an impressive facade.’ Elson shows well how good
governance and sound economic policies were undermined by the political
ills that proliferated during the last
decade or so of Suharto’s highly personalised and increasingly authoritarian
rule. The book is not of course primarily
concerned with Suharto’s economic
policies so much as with how he balanced the political pressures he had to
cope with; but the former loom large at
sev eral points, es pecia lly 1 966–68,
1974–76 and 1986–89, all of which are
analysed cogently, although fairly conventionally.
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254
Elson’s broad and deep knowledge
of Indonesia’s earlier socio-economic
history finds expression in his apt conclusion about Suharto’s rule. ‘His period of office represented probably the
greatest enduring period of growth in
the country’s history, and brought hitherto only imagined levels of prosperity
and hope to millions of Indonesians.
Moreover, whatever the damage caused
by corruption, much of that growth was
channelled into productive investment,
into the elaboration of physical infrastructure and communications, into
education, family planning, and into agricultural and industrial development.
..... On the political front, his record is
much more mixed … [H]e created a longlived phase of political order and relative tranquillity such as the country had
not known since the high days of Dutch
colonialism. But that order came at great
cost.’
I would have liked to see more analysis of why (and how) Suharto dumped
or diminished his loyal and longstanding technocratic advisers in the 1990s,
quite harshly in several cases, although
not completely—and also of why they
Book Reviews
stuck with him for so long despite
myriad disappointments and, one suspects, moments of deep despair. The
story of ‘Suharto and his generals’ was
told brilliantly by David Jenkins nearly
20 years ago and threw valuable light
on the way the president established his
dominance over the military elite. We
now need the story of ‘Suharto and his
technocrats’ to be told more fully, by an
economist with real knowledge of the
way the politic s of economic policy
making, patrimonialism and privilege
bec am e in c r eas in gly inter twined
throughout the 30 years of his rule. (A
useful insider’s account of the years up
to 1993 has already been given by Radius Prawiro [1998], Indonesia’s Struggle
for Economic Development: Pragmatism in
Action, Oxford University Press, Kuala
Lumpur. But he was too close to the action to be regarded as the last word on
the subject.) Elson has provided the essential political context. But an authoritative economic analysis of the deeper
machinations is still needed.
Jamie Mackie
ANU
William Easterly (2001), The Elusive Quest for Growth: Economists’ Adventures and
Misadventures in the Tropics, MIT Press, Cambridge MA, pp. xiii + 342. Cloth: US$29.95.
While ‘The Quest for Growth’ is an apt
title, the subtitle may not evoke the same
consensus. Part I of this book argues why
growth matters, Part II documents the
many failed ‘panaceas’, drawing on the
author’s experience as an economist
with the World Bank, while Part III considers the alternative in the form of getting the incentives right for growth. The
book does justice to the first two parts,
leaving the reader with a sense of hopelessness about how growth can be
raised in poor countries.
Chapter 1 starts with the tale of an excursion to a small village in Lahore, Pakistan, where the lack of basic amenities
such as primary education, health care,
electricity, sanitation, food and shelter is
highlighted. Indeed these deficiencies are
not uncommon: the reader is bombarded
with evidence of the suffering of the millions of the world’s poor and the oppression they face. Easterly draws on several
studies to make a causal link between
growth in national income (GDP) and
reductions in poverty.
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Book Reviews
Chapter 2 considers the many failed
attempts to promote growth in poor
countries. Harrod, Domar and Rostow
are (still!) used to rationalise the use of
aid to meet the ‘financing gap’ for
growth ‘take-off’ in countries from Africa to Latin America. Chapter 3 uses
the Solow model (forgetting Swan 1956)
to highlight the substitutability of
labour for capital in production, noting
that labour-augumenting technological
progress can be the only source of longrun growth. The author dismisses evidence for convergence in income levels
by attributing the observed convergence
to selection bias—‘the winners write
economic history’.
Chapter 4 dismisses the dogma (wisdom) of investment in human capital as
the route to prosperity. The schooling–
growth nexus is debunked with evidence
from Africa and Asia showing an absence
of statistical association between growth
in years of schooling and growth of per
capita GDP. The conclusion is that schooling contributes to growth only when
incentives for growth, rather than redistribution, exist; the onus on creation of
such incentives is claimed to rest with the
government. Chapter 5 similarly dismisses population control as a panacea
for prosperity, given the absence of a statistical association between population
growth and growth in per capita income.
It points out that development is by far the
most effective population control measure,
where families increasingly trade off
‘quantity of children for quality of children’, the latter encompassing human
capital investment. Chapters 6 and 7 turn
to the role and repeated failures of international institutions in raising growth in
poor countries. Aid and adjustment loans
given without a subsequent growth impact have led to rising debt levels among
the recipients. Chapter 7 argues that debt
relief is doomed to fail given that it rewards
irresponsible governance.
255
The third part of the book begins with
chapter 8, about increasing returns and
particularly the notion that returns to
an individual’s skill are positively dependent on the average skill level of coworkers. The gap between social and
private returns, the presence of poverty
and wealth traps (multiple equilibria),
and the economics of agglomeration are
explained in accessible language. It is
proposed that governments subsidise
knowledge accumulation, funded possibly via consumption taxes, to lift an
economy out of a poverty trap. Curiously,
the incentives for politicians and bureaucrats to engage in such interventions are not discussed. Chapter 9 draws
on Schumpeter’s notion of ‘creative destruction’ as being fundamental to technological progress. The potential for
leap-frogging by lagging nations to the
technological frontier, as recognised by
Brezis et al. (1993), and the role of vested
interests in stalling adoption of fresh
technology are used to highlight the advantage of backwardness (that a country can adopt new technology more
cheaply if it lacks the earlier technology).
Given the complementarity between
technology and skills, it is argued that a
critical mass of both is required before
the virtuous effects materialise. Whether
the equilibrium that prevails in the end
is a poverty or wealth trap depends, according to the author, ‘on both luck and
government policy’ (p. 192).
Chapters 10 and 11 are both humbling to the economic practitioner, the
former arguing that luck plays as big a
role as ability in achieving prosperity,
while the latter highlights government
interventions that extinguish growth.
The propositions here are in sharp contrast to those of Lucas (2000), who begins with the assumption that the world
in 1800 had a per capita income of $600
in 1985 prices. Lucas assumes that each
economy subsequently jumped on the
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256
path to growth in a random fashion, but
with the advantage of backwardness.
This overly simplistic model is able to
mimic many of the observed realities,
including the level of per capita income
of the lead economy, conditional convergence, and global income inequality
peaking in 1970 but then predicted to
decline to zero by 2100. Given the similarity in the assumptions they make on
the growth process, the contrast in conclusions between Easterly and Lucas
suggests that Easterly may be a little too
pessimistic on the future of the world’s
poor. Chapter 12 examines the debilitating effects of corruption on economic
growth, while chapter 13 discusses opportunities presented to governments by
divided societies to pursue ‘growthdestroying’ policies. The concluding
chapter notes that ‘it is devilishly difficult to get incentives right for creating
growth’ (p. 288), and so the quest for
growth remains to be fulfilled.
This book makes sobering reading for
advocates of a role for policy in growth.
It draws on the extensive literature on
growth theory and its application, bringing these home in the form of the many
Book Reviews
failed experiments of the past 60 years. It
is written in accessible language, without sacrificing the conceptual foundations of the grow th literatur e. In
summary, the book is an honest attempt
to highlight the many failures in development policy, drawing on lessons from
both theory and empirics on the growth
process. Perhaps a smattering of success
stories such as those of Botswana, Malaysia and Mauritius, and some optimism
from theory such as that found in Lucas
(2000), would have left the reader with
less of a sense of hopelessness about the
prospects of the very poor.
Satish Chand
ANU
References
Brezis, E.S., P.R. Krugman and D. Tsiddon
(1993), ‘Leapfrogging in International
Competition’, American Economic Review
83 (5): 1,211–19.
Lucas, R.E. Jr. (2000), ‘Some Macroeconom ics of the 21st Century’, Journal of Economic
Perspectives 14 (1): 159–68.
Swan, T. (1956), ‘Economic Growth and Capital Accumulation’, Economic Record 32:
334–61.
Eva Riesenhuber (2002), The International Monetary Fund under Constraint: Legitimacy
of Its Crisis M anagement, Kluwer Law International, The Hague, pp. 440.
²115.00; US$100.00; £70.00.
Eva Riesenhuber has undertaken a comprehensive analysis of the role of the IMF
in the Asian crisis of the late 1990s. Particularly valuable is the in-depth discussion of the ‘conditionality’ governing the
provision of IMF resources. However, the
book’s conclusions —and thus its ultimate usefulness—are seriously undermined by the author’s flawed grasp of
the founding principles that govern IMF
lending operations.
A major theme of the book is that the
IMF did not have the legal mandate under its Articles of Agreement to force the
Asian countries to undertake structural
reforms during the Asian crisis. This argument is flawed. While the Articles of
Agreement do not refer specifically to
structural reforms, they contain nothing
that precludes the IMF from introducing structural conditionality. In fact,
under the Second Amendment enacted
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Book Reviews
in 1978, the IMF created the Extended
Fund Facility (EFF) specifically to deal
with cases in which structural distortions were the root cause of the adjustment problem. Provisions governing the
EFF are spelled out in Selected Decisions
and Selected Documents of the International
Monetary Fund (2000: 165). These provisions specify situations in which an
extended facility could apply. They include: (a) an economy suffering serious
payments imbalance relating to structural maladjustments in production and
trade where prices and cost distortions
have been widespread; and (b) an economy characterised by slow growth and
an inherently weak balance of payments
position which prevents pursuit of an
active development policy. There is thus
no legal constraint to the IMF imposing
conditions on structural measures.
It is nevertheless worth considering
whether its programs went too far in imposing structural reforms on the Asian
crisis countries. Critics have held that an
excessive focus of IMF programs in Asia
on structural issues undermined market
confidence, as these countries were not
in a position to implement such reforms
in the short term. According to this view,
to which Riesenhuber also subscribes, the
IMF should have focused on macroeconomic issues and stabilised economies
by adhering to its mandate of dealing
with monetary, fiscal and exchange rate
polices.
There are a number of problems with
this argument. First, the root cause of the
crisis in Asia was structural. And markets were focusing on structural reforms
as a test of the governments’ resolve to
deal effectively with longstanding economic distortions. No one expected that
these problems would disappear overnight, but governments needed to make
a strong start to demonstrate commitment
to reforming their economies. Korea, under the leadership of President Kim Dae
257
Jung, was successful in doing just that,
with the result that Korea’s financial
crisis was contained quickly and the
economy stabilised. In Indonesia, however, President Soeharto, his family and
the cronies circled the wagons and
thwarted the reform efforts of the technocrats. President Soeharto lost on two
counts: by agreeing to IMF conditions he
appeared weak domestically, and by not
delivering on reforms, he lost the confidence of the markets.
It is, of course, possible that a substantial infusion of funds would have
c ontained the financ ial cr isis and
stabilised the exchange rate. But the
amount required would have been unrealistically high. Stanley Fischer, the
First Deputy Managing Director of the
IMF, who was involved directly in these
programs, estimates that roughly $100
billio n would have been needed to
stabilise the situation (see Fischer’s
Robbins Lecture posted at www.iie.com/
fischer). As Riesenhuber recognises,
none of the creditor countries had any
intention of delivering funds under the
second line of defence, in which the
major donors made a commitment to
provide additional resources to augment
funds provided by multilateral institutions. It would, therefore, have been unrealistic to expect the IMF to stabilise the
situation by a huge infusion of funds
into these countries.
To be fair, in the case of Indonesia, the
IMF did get carried away and allow structural measures to proliferate—a point that
is recognised by Fischer in his Robbins
Lecture. This was partly because there
was co nsider able pres sur e fr om
Indonesia’s technocrats themselves for
the IMF to force this issue. I vividly recall
that when I led the early negotiations in
Indonesia senior policy makers were
even keener than the IMF to insert commitments on structural issues into the
Letter of Intent. They saw this as their
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258
best chance to force President Soeharto
to put a stop to the rampant corruption
by his family and his cronies. It was inconceivable that the IMF should deny the
technocrats their chance to force some
serious reforms. Alas, Soeharto did not
realise the gravity of the situation; he let
slip the opportunity to address the serious problems undermining the Indonesian economy, and ultimately fell from
power.
This book provides considerable food
for thought. It is, in the main, well researched and well written. Nevertheless,
since Riesenhuber makes some funda-
Book Reviews
mental errors in her assessment of the
Fund’s legal mandate during the Asian
crisis, her conclusions fall short of the
mark and her book adds little to the important debate about the role of the IMF
in times of significant economic upheaval.
Bijan Aghevli*
Washington DC
*
Bijan Aghevli was Senior Deputy Director for the Asia–Pacific Department of
the IMF until May 1999. He negotiated
th e IMF pr ogr am with Ind on es ia
through May 19 98, when President
Soeharto lost power.
Yun-Peng Chu and Hal Hill (eds) (2001), The Social Impact of the Asian Financial Crisis,
Edward Elgar, Cheltenham, pp. xviii + 258. Cloth: £55.00.
It is now five years since the Thai authorities were forced to float the baht,
triggering what rapidly became known
in the media and academic circles as the
Asian crisis. Arguably no single event,
economic or political, has had a more
dramatic impact on the Southeast Asian
economies as a group since the ending
of the Vietnam conflict in 1975. The crisis and the growth collapses that followed in 1998 have forced many in the
region and beyond to re-evaluate the
idea of ‘East Asian exceptionalism’
propagated by a number of publications
in the decade from 1986 to 1996. The
most celebrated was the 1993 ‘Asian
Miracle’ report of the World Bank; indeed until July 1997 both the Bank and
other multilateral and bilateral donors,
as well as many academics, kept up a
steady flow of publications stressing
that rapid economic growth was likely
to continue in much of Asia well into
the new century. We now know better;
indeed some who puffed up the fastgrowing ASEAN economies in the 1980s
and 1990s are now writing the region
off as a basket case. Instead of comparisons with Japan, Taiwan and South
Korea, we are now hearing that the
ASEAN region may have more in common with Latin America, that future
growth rates may be both lower and far
more erratic, and that financial crises
may be a recurring feature of the economic landscape for decades to come.
To a considerable extent, such judgments reflect the fact that many economic
commentators in the press, in banking
and finance, and in government and international agencies have not had a longterm engagement with the economies of
the region, and have, at best, only a slender grasp of their evolution over a period
of decades rather than months or years.
A book examining the social impact of
the Asian crisis written by a group of academics who, with one exception, come
from Asia, and who all have been studying the region for several decades, is thus
to be welcomed. In their introductory
chapter, the editors set out reasons why
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Book Reviews
the Asian crisis should not just be
viewed as a passing ‘blip’ in the longrun trend of growth. First, the extent of
the growth collapse in the worst affected
economies was severe, and indeed unprecedented in recent times. Second, the
crisis has left in its wake major problems
in the corporate and financial sectors,
and resolving them is proving painfully
slow. The editors rightly stress that much
of the crisis remains unexplained, although it is clear that both its causes and
its consequences have varied greatly by
country.
The six case studies (Thailand, Malaysia, Indonesia, the Philippines, Taiwa n and So uth Ko rea) all co ntain
analyses of the events leading up to the
crisis, and of its social impacts. In
discussing the period before the flotation of the baht and the subsequent ‘contagion’ in neighbouring economies,
Krongkaew presents a full account of
the factors that caused the Bank of Thailand seriously to underestimate the problems in both the financial sector and the
real economy. It made a ‘grave error’ in
predicting strong export expansion in
1997, and turned a blind eye to the consequences for capital inflows of tight
domestic monetary policy under what
was perceived to be a ‘hard peg’ to the
dollar. Krongkaew notes the failure of
the technocrats within the Bank of Thailand to interact with those in universities and in other parts of government
who were predicting trouble. In analysing the reasons for the contagion to Malaysia, Shari lists a number of ‘emerging
concerns’ that affected investor confidence, including a slowdown in export
growth, and excessive credit expansion.
In both Malaysia and Indonesia, and
to a lesser extent in the Philippines,
Thailand’s problems certainly served as
a ‘wake-up call’ to investors to scrutinise recent trends in these economies more
carefully. In the last part of 1997 they be-
259
came increasingly alarmed at what they
saw. In Indonesia, where at first most
commentators thought that ‘strong fundamentals’ would prevent serious contagion from Thailand, the Soeharto
regime proved incapable of restoring
confidence in the last months of 1997. Hill
gives a brief account of events leading to
the collapse of the rupiah and Soeharto’s
resignation in May 1998. As he became
more ill and isolated, Soeharto consulted
no one beyond a narrow circle of family
members and cronies. Not only foreign
investors but many Indonesians decided
that the only way to preserve the value of
their savings was to convert them into
foreign currency. Many Malaysians were
drawing the same conclusion from the
behaviour of their government. In Malaysia the ensuing capital flight was halted
only after the controversial decision to
peg the ringgit and control capital flows
in September 1998.
The effects of the crisis on living standards in Thailand and Indonesia were
cushioned to some extent by the fact that
the immediate impact of the 1998 growth
collapse was on investment expenditures
rather than consumption expenditures.
Although private consumption did decline and poverty increased in both
economies, the problems were not as
catastrophic as some predicted. The
devaluation did of course lead to an increase in nominal incomes for smallholder export producers, and on balance
rural areas in most parts of Asia were
less badly affected than the towns and
cities. Balisacan and Edillon’s analysis
of the effects of the crisis on households
in the Philippines suggests that many
had to adjust by eating less expensive
food, increasing hours of work and taking children out of school, and that,
other things being equal, women workers suffered more unemployment than
men. One suspects that this would also
be true in other parts of Asia.
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260
What effects will the crisis have on
the longer-term behaviour of governments in Asia? Most of the authors discuss the various ‘social safety net’
programs implemented, usually with
mixed success, in the wake of the crisis.
In several economies it appears that government initiatives were aimed at the
more politically sensitive groups in urban areas, rather than at the really poor.
In the longer run, in Thailand, Indonesia and the Philippines, the problem of
how governments might assist the most
marginalised households, especially in
rural areas, will persist well after the
immediate consequences of the crisis
and the growth collapse are over. At the
international level, Yun-peng Chu argues for the establishment of an Asian
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Monetary Fund, which ‘should assist
the troubled economies in their revitalisation, and install an early-warning system to detect financial risks’. A sceptical
reader might question whether an AMF
would be any more successful than the
IMF in preventing financial crises from
emerging again in Asia. Perhaps, as
Raymond Goldsmith argued, they are a
childhood disease of capitalism for
which we have not yet found a vaccination. At best, policy makers in Asia can
learn from the events of 1997–98, and
treat the afflicted economies more
quickly and effectively when the disease
next strikes.
Anne Booth
SOAS, University of London
Marcel P. Timmer (2001), The Dynamics of Asian Manufacturing: A Comparative Perspective in the Late Twentieth Century, Edward Elgar, Cheltenham, pp. 328. £59.95;
US$95.00.
Economists have produced numerous
studies of the productivity performance
of Asian developing economies in the
1990s. The impetus for these was the debate over whether economic development
in Asia was due simply to capital accumulation or to both capital accumulation
and productivity growth. The point of
this debate was that the rapid economic
growth enjoyed by most Asian economies
would not be sustainable without improvements in productivity growth.
Marcel Timmer’s book, the result of
PhD research undertaken at the Eindhoven University of Technology, is a recent contribution to this literature. It
presents a comparative analysis of productivity performance in five Asian countries: China, Indonesia, South Korea,
India and Taiwan. The study measures
and explains comparative productivity
levels and growth within the manufacturing industries for the period 1963 to
1993. It differs from earlier studies in that
it focuses not only on productivity growth
but also on relative levels of productivity
across countries. The advantage of
Timmer’s approach is that it permits an
assessment of the productivity gap between countries, and whether the gap
has narrowed over time (i.e. the ‘catchup’ process), thus providing a richer
analysis of the industrialisation process.
Chapter 1 (the introduction) and chapter 2 (on the catch-up hypothesis) are
short, essentially setting the stage for
what follows. The next four chapters are
the core of the book, and focus on measurement and benchmarking of relative
productivity measures across countries.
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Book Reviews
Chapters 3 and 4 present a sound methodology for international comparison of
productivity levels. The author is well
aware of the conceptual difficulties in
comparing levels across countries, and
overcomes these by benchmarking productivity levels with those in the US.
Chapter 5 compares aggregate productivity across countries, identifying periods of rapid catch-up (relative to the US)
and stagnation, while chapter 6 compares productivity levels of subsectors of
manufacturing across countries. Chapter 7 considers whether industry structure affects productivity levels, and
chapter 8 reviews, in light of the study’s
findings, the debate on the link between
approaches to industrial policy and productivity catch-up. All chapters are of an
easily digestible length, but some parts
are quite technical and not easily accessible to non-economists.
Several interesting findings deserve
special mention. First, the study finds
that increases in productivity levels are
an important part of the growth process
even in the early stages of industrialisa tion, and this growth is generally broadbased. Second, the productivity gap
between the East Asian countries and the
US has narrowed considerably over time,
but was still large in 1993. For example,
Timmer estimates that by 1993 Korea’s
productivity level was still less than half
that of the US. The productivity gap is
even larger for India, China and Indonesia. For example, value added per worker
in China and Indonesia was only around
5% of that in US manufacturing in 1993,
although there is significant variation
across sectors within each country. A
third finding is that the labour productivity gap was due partly to differences
in capital intensity across countries, but
primarily to differences in total factor
productivity (TFP) growth. According to
Timmer, Indonesia’s TFP level was only
261
about 18% of the US level in 1993. On the
basis of these results the author concludes that Indonesia and the other four
Asian economies still have significant
room for productivity catch-up with the
US.
One weakness of the book is that it
does not deal adequately with the link
between the different countries’ approaches to industrial policy and their
catch-up in productivity. This of course
remains a relevant policy issue today.
The author does note that for Korea and
Taiwan (two countries that had a more
‘interventionist’ industrial policy than
the others), the targeted sectors did not
perform any better in productivity terms
than the non-targeted sectors. He concludes that while selective policies such
as cheap credit may have stimulated
rapid resource accumulation, general
policy orientation—giving priority to
macroeconomic stability, openness to
trade, and provision of infrastructure and
general education—played a dominant
role in the broad-based productivity improvements of these two countries. In this
regard, an econometric approach separating the structural variables and the
various policy variables—trade policy,
subsidies, R&D incentives and expenditure on education—would have provided a rich insight into why some
countries experienced faster catch-up
than others.
In sum, this is a comprehensive and
technically sound study of productivity
levels and growth in five important Asian
countries. While parts of the book are
technical and may not be very accessible
to general readers, it will be an important reference for university courses on
the economics of development.
Kelly Bird
Partnership for Economic Growth
(USAID/Bappenas)/ANU
262
Book Reviews
J. Soedradjad Djiwandono (2001), Mengelola Bank Indonesia dalam Masa Krisis [Managing Bank Indonesia during the Economic Crisis], LP3ES, Jakarta, pp. xiii + 398.
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J. Soedradjad Djiwandono (2001), Bergulat dengan Krisis dan Pemulihan Ekonomi Indonesia [Struggling with Economic Crisis and Recovery in Indonesia], Sinar Harapan,
Jakarta, pp. xii + 321.
Since 1997 Indonesia has been mired in
economic crisis, and our fortunes have
risen or fallen in concert with the rupiah.
It has been a long wait, and we are
haunted by two questions—when will
we begin to emerge from this crisis, and
where will the real signs of economic recovery appear? It might be useful to
understand what has happened, particularly inside Indonesia’s central bank,
during these long years of gloom. Two
books by Soedradjad Djiwandono, former
governor of the central bank, are important sources for this purpose.
It would be no surprise if the first book
were considered a defence of Soedradjad
Djiwandono. It contains his personal
account of debates on various matters,
ranging from the sources of the crisis to
tight money policy, the permanent closure of 16 banks in November 1997, Bank
Indonesia liq uidity support (BLBI,
Bantuan Likwiditas Bank Indonesia)
and other issues related to the role of
Bank Indonesia from July 1997 to February 1998. In the introduction, Djiwandono admits that the book is far from
comprehensive and that he sees it as a
personal account rather than a rigorous
academic study. Nevertheless, it is most
useful as a supplement to the various
investigations of the crisis in Indonesia.
The author discusses what really
went on in Bank Indonesia during the
economic crisis and what the sources of
the crisis were. He outlines the initial
debate, centred on the link between currency depreciation and economic fundamentals. One view suggested that the
economy was basically as sound as it
had been before, while others argued
that a large depreciation must mean that
Indonesia’s economic fundamentals
were much less sound than was generally believed. Both positions identified
the major institutional problem of poor
governance or KKN (‘corruption, collusion and nepotism’) as the key to the
crisis. Djiwandono argues that the economic fundamentals were relatively
strong, but that Indonesia had a major
problem in the banking system; the
source of the crisis was a mixture of internal factors, including a weak banking system, and external factors such as
the financial panic in Thailand. This
argument seems sound, given that there
is no clear link between the crisis and
economic fundamentals such as GDP
growth, inflation and total factor productivity. The economic crisis of 1997–
98 was mainly to do with financial
markets, exchange rates, the problem of
short-term debt, capital mobility and
political disturbances. In addition, the
uniq ue eq uilibr ium Kr ugman-type
model cannot be said to apply in East
Asian countries other than Thailand.
Djiwandono also points out correctly
that the economic crisis cannot entirely
be explained by KKN. If this were the
trigger, why did it take until July 1997
for the economy to begin to unravel,
and why did China or Vietnam, which
were as corrupt as Indonesia, escape
the crisis?
The book tells the story behind the closing of 16 banks in November 1997, an
action that provoked a shower of criticism. Contrary to the popular argument
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Book Reviews
that the disastrous effects of the closures
were due to the absence of deposit insurance, Djiwandono argues that the resulting bank runs were created by large
depositors. In other words, even if deposit
insurance for small depositors had been
in place, this would not have prevented
bank runs. Learning from this failure the
IMF, with the blessing of the Indonesian
government, subsequently provided a
blanket deposit guarantee. It is clear that
the IMF did not expect bank runs to result from the closures: as Djiwandono
points out, the Fund kept arguing that
the value of the 16 banks represented
only 3% of the total assets in the banking
system, and therefore the closures would
not affect the economy adversely. Unfortunately, history has shown otherwise:
the closures led to bank runs to which
the central bank responded by providing liquidity credit support (BLBI). It is
unfortunate that Djiwandono does not
explain in more detail to what extent the
bank runs were motivated by fear of the
collapse of banks and the loss of deposits, and to what extent by a desire to buy
foreign currency and speculate on the
rupiah. Since both motives are likely to
have been present, the provision of BLBI,
intended to prevent banks from collapsing, was (without sterilisation) in fact also
financing speculation against rupiah.
Another interesting story in the volume concerns interest rates during the
crisis. Djiwandono recounts that Bank
Indonesia was under pressure to reduce
liquidity and interest rates, and that other
ministers from ‘the real sector’, and
Soeharto, were in favour of reducing interest rates. He admits that at the time a
high interest rate would only have been
effective in defending the rupiah in the
short term. But he disagreed with the decision of Mar’ie Muhammad (former
Minister of Finance) to convert deposits
owned by state-owned companies into
SBI (Bank Indonesia Certificates), and to
263
stop routine expenditure for two weeks
because it had raised the interbank interest rate by more than 100%.
Although this is a personal rather than
an academic account of the role of Bank
Indonesia during the economic crisis, it
offers many useful insights into the
bank’s role, and into the story behind the
author’s dismissal from its governorship,
an event he considers a great personal
relief.
The second book is a selection of
Djiwandono’s articles and papers in the
media and in seminars. Like the first, it
discusses a wide range of issues that
bear on the relationship between the crisis and KKN, the exchange rate and
Bank Indonesia. It is interesting to read
Djiwandono’s response to the arguments advanced by Steve Hanke, the
Johns Hopkins University adacemic
who promoted to the Indonesian leadership the idea of a Currency Board System (CBS). Djiwandono argues that
foreign reserves were inadequate to support a CBS, and that the lack of a legal
framework and the tendency of the government to intervene in monetary policy
would make a CBS ineffective. This debate is fascinating, particularly if we relate it to current perspectives on the CBS
in relation to the economic crisis in Argentina. As Paul Krugman argues,
Argentina’s currency board allows no
flexibility in monetary policy, making it
difficult for policy makers to respond to
the crisis. Was it a blessing that Indonesia did not adopt a CBS? It remains a big
question.
Even more interesting is the untold political economy story behind the CBS.
D jiwa ndo no wonder s how Steve
Hanke’s name came into the picture and
why he came to Indonesia at the expense
of PT Astra International and under the
name of Simon Holland. As he says, it is
like a detective story (p. 79). Of course it
is dangerously heroic to conclude that
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264
the plan to adopt a CBS was solely driven
by political factors. However, in Indonesia, where political factors are so important in economic decision making, this
question remains of interest. Djiwandono
also recounts how he had to use polite
argument, speaking with Soeharto in a
‘Javanese way’, to voice his opposition
to the CBS idea, which the president supported. He explains his disagreement
with the idea in terms not of the limitations of the CBS system, but merely of the
conditions the government would have
to meet before adopting the CBS. He believed that a CBS could only be effective
Book Reviews
under the right circumstances, which
were not present when the idea was
raised.
Although not providing a comprehensive discussion of the economic crisis in
Indonesia, these two books are useful in
enriching our understanding of it. Some
of the topics covered, including tight
money policy, BLBI and the CBS, are indeed still subjects of debate. Perhaps these
books will stimulate further research on
them.
M. Chatib Basri
University of Indonesia
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
BOOK REVIEWS
To cite this article: (2002) BOOK REVIEWS, Bulletin of Indonesian Economic Studies, 38:2,
251-264, DOI: 10.1080/000749102320145084
To link to this article: http://dx.doi.org/10.1080/000749102320145084
Published online: 17 Jun 2010.
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Date: 19 January 2016, At: 20:25
Bulletin of Indonesian Economic Studies, Vol. 38, No. 2, 2002: 251–64
BOOK REVIEWS
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Tim Lindsey and Howard Dick (2002), Corruption in Asia: Rethinking the Good Governance Paradigm, Federation Press, Sydney, pp. 240. Paper: A$55.00.
‘Governance’ has become a prominent
buzzword among development theorists
and the international aid community in
recent years. Alternative critiques of development theory and bureaucracies
have long argued that we cannot understand how nations become wealthy using abstract economic models that do not
take account of social realities such as
class and power relationships and the
historical legacy of state institutions.
Many of the matters raised (if not the
conclusions reached) by these critiques
have been adopted into the thinking and
practice of international development
agencies. This has included the inner
policy sanctums of the World Bank and,
to a lesser extent, the IMF. The Asian economic crisis of 1997–98, with the sudden end to growth in countries that
seemed to have ‘got the policies right’,
was instrumental in strengthening
doubts about the sufficiency of GDP
growth in itself to provide for both prosperity and democratisation. The appearance immediately before the crisis of the
World Bank’s report on the role of the
state showed that this rethinking also
had a longer pedigree, particularly under Bank president James Wolfensohn.
Nevertheless, the editors of the collection under review, Tim Lindsey and
Howard Dick, argue that notions of governance and corruption are still ‘under-
theorised’, leading to ‘definitional confusion, fuzzy policy, flawed projects and
ineffectual reforms’. Just as earlier aid to
‘the economy’ was wasted because it ignored political realities, so governance
programs often act as if they can avoid
confronting vested power structures. In
Dick’s words, ‘institutional reform is not
a politically disembodied “quick fix”’.
As a contribution to overcoming this
posited paucity of theory, the volume
endeavours to establish some frameworks to examine the categories of governance, corruption and legal reform,
and to test those frameworks in the cases
of Indonesia and Vietnam, and in a comparative piece on former Soviet-bloc Europe. Kanishka Jayasuriya identifies the
new prominence of governance as part
of a ‘post-Washington consensus’, which
he sees as retaining key elements of the
old Washington consensus of open markets, liberalisation and structural adjustment. In particular, the new consensus
retains an instrumentalist attitude to
‘politics as the effective implementation
of agreed technical procedures’ rather
than as an arena of conflict, bargaining
and compromise. Lindsey also sees more
continuities than discontinuities in the
apparently new thinking on governance,
and concludes that ‘there is little reason
to believe that the lessons of the 1970s
have been learnt’. Dick argues for a
ISSN 0007-4918 print/ISSN 1472-7234 online/02/020251-14
© 2002 Indonesia Project ANU
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252
deconstruction of the terms ‘governance’
and ‘corruption’, which he says would
reveal their political (rather than technocratic) intent as part of the ‘neo-liberal
reform agenda promoted by the IMF and
the World Bank’.
The more theoretical articles in this
collection thus introduce a strong critique
of the notion of ‘good governance’, arguing that the idea fails to take account of
the political nature of economic development, while at the same time being suffused with its own political agenda. The
promise that the critique will be tested by
the other authors is not really fulfilled,
however. As in most multi-authored collections, the contributions vary in quality and reflect the differing interests and
backgrounds of the contributors. While
all provide good insights into corruption
and legal reform in their respective subject countries, few explicitly come to grips
with the issues raised in the theoretical
critique.
Gary Goodpaster, for example, provides a very useful description of the
nature and characteristics of corruption
in Indonesia. But his only reference to
the critical theses of the collection is to
reject them, suggesting merely that the
problem is ‘donor impatience’. He concludes that IMF/World Bank conditionality does have a long-term effect
in forcing reluctant governments to reform. Other articles, particularly those
on the reform of legal and judicial in-
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stitutions and the creation of anti-corruption agencies, implicitly or explicitly highlight the political difficulties
of overcoming the resistance of powerful vested interests. But none of this
would surprise any international donor official with a good knowledge of
his or her posting.
What the book does achieve is to provide excellent theoretical and empirical
material for rethinking the governance
paradigm and, by extension, the role of
international financial and development
institutions. It is a timely contribution to
a debate that must be had. The paradox,
however, is that those best placed to do
the rethinking are dependent on the very
institutions they would seek to change.
As the editors point out, ‘jobs are being
created and good consultancy rates are
being paid in this new branch of the development industry’, whatever the efficacy of aid for good governance. Foreign
assistance programs will chug along regardless, in response to their own diplomatic and bureaucratic imperatives:
relationships maintained and budgets
expended. This collection calls for a
pause for thought, to start a dialogue ‘between the world as it is and the world of
ideals’, without which all the dollars
outlaid will have little effect.
Stephen Sherlock
Information and Research Services
Parliament of Australia
Book Reviews
253
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R.E. Elson (2001), Suharto: A Political Biography, Cambridge University Press, Cambridge and Melbourne, pp. xxi + 389. Cloth: A$59.95.
President Suharto’s crucial role in the
transformation of Indonesia from an economic basket case in 1965–66 to ‘Asian
Tiger’ status in the early 1990s is reasonably well understood in terms of broad
economic policy. But the mind and motivations of the man himself have always
been something of a puzzle. And the reasons for his later slide from predominantly
successful economic policies during his
first 20 years towards the fatal aberrations
of the mid 1990s are still shrouded in
mystery at a deeper personal level.
Elson tells the story of Suharto’s life
superbly in this authoritative and very
readable biography. It will long remain
essential reading for any student of the
New Order and its political dynamics, of
value also for hard-nosed economists
searching for theoretical explanations of
the miracle Suharto wrought. ‘Suharto
was born into a poor peasant family’, he
writes, ‘but he presided over his country’s
industrial transformation and is thought
by many to control a family fortune worth
billions of dollars. Such paradox is a key
motif of his life; together with his public
mask and evasive, undemonstrative manner, it makes the task of attempting to understand the man elusive in the extreme.’
The great strength of this biography is
the way Elson traces how Suharto responded so successfully to the diverse
challenges and frequently changing circumstances he had to face at different
phases of his life, gaining increased confidence—and eventual hubris—in each
of them. The five chapters dealing with
the years up to 1965 are especially illuminating, while in the next five the various phases of his 30 years as president
are all deftly analysed. Elson’s interpretation of the controversial 1965 Gestapu
coup and Suharto’s handling of it seemed
to me a balanced and broadly convincing one. His account of how Suharto then
consolidated his grip on state power and
began to shape the New Order regime
between 1966 and 1971 is masterly, as is
the story of how his relations with the
Army top brass changed between 1982
and 1993, almost imperceptibly but fatefully for Indonesia’s future.
The key parts played by Widjojo,
Sadli, Ali Wardhana and the other technocrats in shaping the economic policies tha t und erpinned Ind onesia ’s
‘economic miracle’ are well described
(but briefly, and are perhaps a shade too
understated) as also are their roles in
helping to educate Suharto in the rudiments of economics in the early years of
his presidency. It is a pity that the decline in their influence in his later years
had to be dealt with so briefly, when
good times led to bad policies, enabling
crony capitalism and nepotism to take
over disastrously. ‘The technocrats
made enormous efforts to shape a new
economic landscape, but were unable to
alter fundamentally the socio-political
context governing the [political] environment … What emerged was an impressive facade.’ Elson shows well how good
governance and sound economic policies were undermined by the political
ills that proliferated during the last
decade or so of Suharto’s highly personalised and increasingly authoritarian
rule. The book is not of course primarily
concerned with Suharto’s economic
policies so much as with how he balanced the political pressures he had to
cope with; but the former loom large at
sev eral points, es pecia lly 1 966–68,
1974–76 and 1986–89, all of which are
analysed cogently, although fairly conventionally.
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254
Elson’s broad and deep knowledge
of Indonesia’s earlier socio-economic
history finds expression in his apt conclusion about Suharto’s rule. ‘His period of office represented probably the
greatest enduring period of growth in
the country’s history, and brought hitherto only imagined levels of prosperity
and hope to millions of Indonesians.
Moreover, whatever the damage caused
by corruption, much of that growth was
channelled into productive investment,
into the elaboration of physical infrastructure and communications, into
education, family planning, and into agricultural and industrial development.
..... On the political front, his record is
much more mixed … [H]e created a longlived phase of political order and relative tranquillity such as the country had
not known since the high days of Dutch
colonialism. But that order came at great
cost.’
I would have liked to see more analysis of why (and how) Suharto dumped
or diminished his loyal and longstanding technocratic advisers in the 1990s,
quite harshly in several cases, although
not completely—and also of why they
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stuck with him for so long despite
myriad disappointments and, one suspects, moments of deep despair. The
story of ‘Suharto and his generals’ was
told brilliantly by David Jenkins nearly
20 years ago and threw valuable light
on the way the president established his
dominance over the military elite. We
now need the story of ‘Suharto and his
technocrats’ to be told more fully, by an
economist with real knowledge of the
way the politic s of economic policy
making, patrimonialism and privilege
bec am e in c r eas in gly inter twined
throughout the 30 years of his rule. (A
useful insider’s account of the years up
to 1993 has already been given by Radius Prawiro [1998], Indonesia’s Struggle
for Economic Development: Pragmatism in
Action, Oxford University Press, Kuala
Lumpur. But he was too close to the action to be regarded as the last word on
the subject.) Elson has provided the essential political context. But an authoritative economic analysis of the deeper
machinations is still needed.
Jamie Mackie
ANU
William Easterly (2001), The Elusive Quest for Growth: Economists’ Adventures and
Misadventures in the Tropics, MIT Press, Cambridge MA, pp. xiii + 342. Cloth: US$29.95.
While ‘The Quest for Growth’ is an apt
title, the subtitle may not evoke the same
consensus. Part I of this book argues why
growth matters, Part II documents the
many failed ‘panaceas’, drawing on the
author’s experience as an economist
with the World Bank, while Part III considers the alternative in the form of getting the incentives right for growth. The
book does justice to the first two parts,
leaving the reader with a sense of hopelessness about how growth can be
raised in poor countries.
Chapter 1 starts with the tale of an excursion to a small village in Lahore, Pakistan, where the lack of basic amenities
such as primary education, health care,
electricity, sanitation, food and shelter is
highlighted. Indeed these deficiencies are
not uncommon: the reader is bombarded
with evidence of the suffering of the millions of the world’s poor and the oppression they face. Easterly draws on several
studies to make a causal link between
growth in national income (GDP) and
reductions in poverty.
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Chapter 2 considers the many failed
attempts to promote growth in poor
countries. Harrod, Domar and Rostow
are (still!) used to rationalise the use of
aid to meet the ‘financing gap’ for
growth ‘take-off’ in countries from Africa to Latin America. Chapter 3 uses
the Solow model (forgetting Swan 1956)
to highlight the substitutability of
labour for capital in production, noting
that labour-augumenting technological
progress can be the only source of longrun growth. The author dismisses evidence for convergence in income levels
by attributing the observed convergence
to selection bias—‘the winners write
economic history’.
Chapter 4 dismisses the dogma (wisdom) of investment in human capital as
the route to prosperity. The schooling–
growth nexus is debunked with evidence
from Africa and Asia showing an absence
of statistical association between growth
in years of schooling and growth of per
capita GDP. The conclusion is that schooling contributes to growth only when
incentives for growth, rather than redistribution, exist; the onus on creation of
such incentives is claimed to rest with the
government. Chapter 5 similarly dismisses population control as a panacea
for prosperity, given the absence of a statistical association between population
growth and growth in per capita income.
It points out that development is by far the
most effective population control measure,
where families increasingly trade off
‘quantity of children for quality of children’, the latter encompassing human
capital investment. Chapters 6 and 7 turn
to the role and repeated failures of international institutions in raising growth in
poor countries. Aid and adjustment loans
given without a subsequent growth impact have led to rising debt levels among
the recipients. Chapter 7 argues that debt
relief is doomed to fail given that it rewards
irresponsible governance.
255
The third part of the book begins with
chapter 8, about increasing returns and
particularly the notion that returns to
an individual’s skill are positively dependent on the average skill level of coworkers. The gap between social and
private returns, the presence of poverty
and wealth traps (multiple equilibria),
and the economics of agglomeration are
explained in accessible language. It is
proposed that governments subsidise
knowledge accumulation, funded possibly via consumption taxes, to lift an
economy out of a poverty trap. Curiously,
the incentives for politicians and bureaucrats to engage in such interventions are not discussed. Chapter 9 draws
on Schumpeter’s notion of ‘creative destruction’ as being fundamental to technological progress. The potential for
leap-frogging by lagging nations to the
technological frontier, as recognised by
Brezis et al. (1993), and the role of vested
interests in stalling adoption of fresh
technology are used to highlight the advantage of backwardness (that a country can adopt new technology more
cheaply if it lacks the earlier technology).
Given the complementarity between
technology and skills, it is argued that a
critical mass of both is required before
the virtuous effects materialise. Whether
the equilibrium that prevails in the end
is a poverty or wealth trap depends, according to the author, ‘on both luck and
government policy’ (p. 192).
Chapters 10 and 11 are both humbling to the economic practitioner, the
former arguing that luck plays as big a
role as ability in achieving prosperity,
while the latter highlights government
interventions that extinguish growth.
The propositions here are in sharp contrast to those of Lucas (2000), who begins with the assumption that the world
in 1800 had a per capita income of $600
in 1985 prices. Lucas assumes that each
economy subsequently jumped on the
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256
path to growth in a random fashion, but
with the advantage of backwardness.
This overly simplistic model is able to
mimic many of the observed realities,
including the level of per capita income
of the lead economy, conditional convergence, and global income inequality
peaking in 1970 but then predicted to
decline to zero by 2100. Given the similarity in the assumptions they make on
the growth process, the contrast in conclusions between Easterly and Lucas
suggests that Easterly may be a little too
pessimistic on the future of the world’s
poor. Chapter 12 examines the debilitating effects of corruption on economic
growth, while chapter 13 discusses opportunities presented to governments by
divided societies to pursue ‘growthdestroying’ policies. The concluding
chapter notes that ‘it is devilishly difficult to get incentives right for creating
growth’ (p. 288), and so the quest for
growth remains to be fulfilled.
This book makes sobering reading for
advocates of a role for policy in growth.
It draws on the extensive literature on
growth theory and its application, bringing these home in the form of the many
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failed experiments of the past 60 years. It
is written in accessible language, without sacrificing the conceptual foundations of the grow th literatur e. In
summary, the book is an honest attempt
to highlight the many failures in development policy, drawing on lessons from
both theory and empirics on the growth
process. Perhaps a smattering of success
stories such as those of Botswana, Malaysia and Mauritius, and some optimism
from theory such as that found in Lucas
(2000), would have left the reader with
less of a sense of hopelessness about the
prospects of the very poor.
Satish Chand
ANU
References
Brezis, E.S., P.R. Krugman and D. Tsiddon
(1993), ‘Leapfrogging in International
Competition’, American Economic Review
83 (5): 1,211–19.
Lucas, R.E. Jr. (2000), ‘Some Macroeconom ics of the 21st Century’, Journal of Economic
Perspectives 14 (1): 159–68.
Swan, T. (1956), ‘Economic Growth and Capital Accumulation’, Economic Record 32:
334–61.
Eva Riesenhuber (2002), The International Monetary Fund under Constraint: Legitimacy
of Its Crisis M anagement, Kluwer Law International, The Hague, pp. 440.
²115.00; US$100.00; £70.00.
Eva Riesenhuber has undertaken a comprehensive analysis of the role of the IMF
in the Asian crisis of the late 1990s. Particularly valuable is the in-depth discussion of the ‘conditionality’ governing the
provision of IMF resources. However, the
book’s conclusions —and thus its ultimate usefulness—are seriously undermined by the author’s flawed grasp of
the founding principles that govern IMF
lending operations.
A major theme of the book is that the
IMF did not have the legal mandate under its Articles of Agreement to force the
Asian countries to undertake structural
reforms during the Asian crisis. This argument is flawed. While the Articles of
Agreement do not refer specifically to
structural reforms, they contain nothing
that precludes the IMF from introducing structural conditionality. In fact,
under the Second Amendment enacted
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Book Reviews
in 1978, the IMF created the Extended
Fund Facility (EFF) specifically to deal
with cases in which structural distortions were the root cause of the adjustment problem. Provisions governing the
EFF are spelled out in Selected Decisions
and Selected Documents of the International
Monetary Fund (2000: 165). These provisions specify situations in which an
extended facility could apply. They include: (a) an economy suffering serious
payments imbalance relating to structural maladjustments in production and
trade where prices and cost distortions
have been widespread; and (b) an economy characterised by slow growth and
an inherently weak balance of payments
position which prevents pursuit of an
active development policy. There is thus
no legal constraint to the IMF imposing
conditions on structural measures.
It is nevertheless worth considering
whether its programs went too far in imposing structural reforms on the Asian
crisis countries. Critics have held that an
excessive focus of IMF programs in Asia
on structural issues undermined market
confidence, as these countries were not
in a position to implement such reforms
in the short term. According to this view,
to which Riesenhuber also subscribes, the
IMF should have focused on macroeconomic issues and stabilised economies
by adhering to its mandate of dealing
with monetary, fiscal and exchange rate
polices.
There are a number of problems with
this argument. First, the root cause of the
crisis in Asia was structural. And markets were focusing on structural reforms
as a test of the governments’ resolve to
deal effectively with longstanding economic distortions. No one expected that
these problems would disappear overnight, but governments needed to make
a strong start to demonstrate commitment
to reforming their economies. Korea, under the leadership of President Kim Dae
257
Jung, was successful in doing just that,
with the result that Korea’s financial
crisis was contained quickly and the
economy stabilised. In Indonesia, however, President Soeharto, his family and
the cronies circled the wagons and
thwarted the reform efforts of the technocrats. President Soeharto lost on two
counts: by agreeing to IMF conditions he
appeared weak domestically, and by not
delivering on reforms, he lost the confidence of the markets.
It is, of course, possible that a substantial infusion of funds would have
c ontained the financ ial cr isis and
stabilised the exchange rate. But the
amount required would have been unrealistically high. Stanley Fischer, the
First Deputy Managing Director of the
IMF, who was involved directly in these
programs, estimates that roughly $100
billio n would have been needed to
stabilise the situation (see Fischer’s
Robbins Lecture posted at www.iie.com/
fischer). As Riesenhuber recognises,
none of the creditor countries had any
intention of delivering funds under the
second line of defence, in which the
major donors made a commitment to
provide additional resources to augment
funds provided by multilateral institutions. It would, therefore, have been unrealistic to expect the IMF to stabilise the
situation by a huge infusion of funds
into these countries.
To be fair, in the case of Indonesia, the
IMF did get carried away and allow structural measures to proliferate—a point that
is recognised by Fischer in his Robbins
Lecture. This was partly because there
was co nsider able pres sur e fr om
Indonesia’s technocrats themselves for
the IMF to force this issue. I vividly recall
that when I led the early negotiations in
Indonesia senior policy makers were
even keener than the IMF to insert commitments on structural issues into the
Letter of Intent. They saw this as their
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258
best chance to force President Soeharto
to put a stop to the rampant corruption
by his family and his cronies. It was inconceivable that the IMF should deny the
technocrats their chance to force some
serious reforms. Alas, Soeharto did not
realise the gravity of the situation; he let
slip the opportunity to address the serious problems undermining the Indonesian economy, and ultimately fell from
power.
This book provides considerable food
for thought. It is, in the main, well researched and well written. Nevertheless,
since Riesenhuber makes some funda-
Book Reviews
mental errors in her assessment of the
Fund’s legal mandate during the Asian
crisis, her conclusions fall short of the
mark and her book adds little to the important debate about the role of the IMF
in times of significant economic upheaval.
Bijan Aghevli*
Washington DC
*
Bijan Aghevli was Senior Deputy Director for the Asia–Pacific Department of
the IMF until May 1999. He negotiated
th e IMF pr ogr am with Ind on es ia
through May 19 98, when President
Soeharto lost power.
Yun-Peng Chu and Hal Hill (eds) (2001), The Social Impact of the Asian Financial Crisis,
Edward Elgar, Cheltenham, pp. xviii + 258. Cloth: £55.00.
It is now five years since the Thai authorities were forced to float the baht,
triggering what rapidly became known
in the media and academic circles as the
Asian crisis. Arguably no single event,
economic or political, has had a more
dramatic impact on the Southeast Asian
economies as a group since the ending
of the Vietnam conflict in 1975. The crisis and the growth collapses that followed in 1998 have forced many in the
region and beyond to re-evaluate the
idea of ‘East Asian exceptionalism’
propagated by a number of publications
in the decade from 1986 to 1996. The
most celebrated was the 1993 ‘Asian
Miracle’ report of the World Bank; indeed until July 1997 both the Bank and
other multilateral and bilateral donors,
as well as many academics, kept up a
steady flow of publications stressing
that rapid economic growth was likely
to continue in much of Asia well into
the new century. We now know better;
indeed some who puffed up the fastgrowing ASEAN economies in the 1980s
and 1990s are now writing the region
off as a basket case. Instead of comparisons with Japan, Taiwan and South
Korea, we are now hearing that the
ASEAN region may have more in common with Latin America, that future
growth rates may be both lower and far
more erratic, and that financial crises
may be a recurring feature of the economic landscape for decades to come.
To a considerable extent, such judgments reflect the fact that many economic
commentators in the press, in banking
and finance, and in government and international agencies have not had a longterm engagement with the economies of
the region, and have, at best, only a slender grasp of their evolution over a period
of decades rather than months or years.
A book examining the social impact of
the Asian crisis written by a group of academics who, with one exception, come
from Asia, and who all have been studying the region for several decades, is thus
to be welcomed. In their introductory
chapter, the editors set out reasons why
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the Asian crisis should not just be
viewed as a passing ‘blip’ in the longrun trend of growth. First, the extent of
the growth collapse in the worst affected
economies was severe, and indeed unprecedented in recent times. Second, the
crisis has left in its wake major problems
in the corporate and financial sectors,
and resolving them is proving painfully
slow. The editors rightly stress that much
of the crisis remains unexplained, although it is clear that both its causes and
its consequences have varied greatly by
country.
The six case studies (Thailand, Malaysia, Indonesia, the Philippines, Taiwa n and So uth Ko rea) all co ntain
analyses of the events leading up to the
crisis, and of its social impacts. In
discussing the period before the flotation of the baht and the subsequent ‘contagion’ in neighbouring economies,
Krongkaew presents a full account of
the factors that caused the Bank of Thailand seriously to underestimate the problems in both the financial sector and the
real economy. It made a ‘grave error’ in
predicting strong export expansion in
1997, and turned a blind eye to the consequences for capital inflows of tight
domestic monetary policy under what
was perceived to be a ‘hard peg’ to the
dollar. Krongkaew notes the failure of
the technocrats within the Bank of Thailand to interact with those in universities and in other parts of government
who were predicting trouble. In analysing the reasons for the contagion to Malaysia, Shari lists a number of ‘emerging
concerns’ that affected investor confidence, including a slowdown in export
growth, and excessive credit expansion.
In both Malaysia and Indonesia, and
to a lesser extent in the Philippines,
Thailand’s problems certainly served as
a ‘wake-up call’ to investors to scrutinise recent trends in these economies more
carefully. In the last part of 1997 they be-
259
came increasingly alarmed at what they
saw. In Indonesia, where at first most
commentators thought that ‘strong fundamentals’ would prevent serious contagion from Thailand, the Soeharto
regime proved incapable of restoring
confidence in the last months of 1997. Hill
gives a brief account of events leading to
the collapse of the rupiah and Soeharto’s
resignation in May 1998. As he became
more ill and isolated, Soeharto consulted
no one beyond a narrow circle of family
members and cronies. Not only foreign
investors but many Indonesians decided
that the only way to preserve the value of
their savings was to convert them into
foreign currency. Many Malaysians were
drawing the same conclusion from the
behaviour of their government. In Malaysia the ensuing capital flight was halted
only after the controversial decision to
peg the ringgit and control capital flows
in September 1998.
The effects of the crisis on living standards in Thailand and Indonesia were
cushioned to some extent by the fact that
the immediate impact of the 1998 growth
collapse was on investment expenditures
rather than consumption expenditures.
Although private consumption did decline and poverty increased in both
economies, the problems were not as
catastrophic as some predicted. The
devaluation did of course lead to an increase in nominal incomes for smallholder export producers, and on balance
rural areas in most parts of Asia were
less badly affected than the towns and
cities. Balisacan and Edillon’s analysis
of the effects of the crisis on households
in the Philippines suggests that many
had to adjust by eating less expensive
food, increasing hours of work and taking children out of school, and that,
other things being equal, women workers suffered more unemployment than
men. One suspects that this would also
be true in other parts of Asia.
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260
What effects will the crisis have on
the longer-term behaviour of governments in Asia? Most of the authors discuss the various ‘social safety net’
programs implemented, usually with
mixed success, in the wake of the crisis.
In several economies it appears that government initiatives were aimed at the
more politically sensitive groups in urban areas, rather than at the really poor.
In the longer run, in Thailand, Indonesia and the Philippines, the problem of
how governments might assist the most
marginalised households, especially in
rural areas, will persist well after the
immediate consequences of the crisis
and the growth collapse are over. At the
international level, Yun-peng Chu argues for the establishment of an Asian
Book Reviews
Monetary Fund, which ‘should assist
the troubled economies in their revitalisation, and install an early-warning system to detect financial risks’. A sceptical
reader might question whether an AMF
would be any more successful than the
IMF in preventing financial crises from
emerging again in Asia. Perhaps, as
Raymond Goldsmith argued, they are a
childhood disease of capitalism for
which we have not yet found a vaccination. At best, policy makers in Asia can
learn from the events of 1997–98, and
treat the afflicted economies more
quickly and effectively when the disease
next strikes.
Anne Booth
SOAS, University of London
Marcel P. Timmer (2001), The Dynamics of Asian Manufacturing: A Comparative Perspective in the Late Twentieth Century, Edward Elgar, Cheltenham, pp. 328. £59.95;
US$95.00.
Economists have produced numerous
studies of the productivity performance
of Asian developing economies in the
1990s. The impetus for these was the debate over whether economic development
in Asia was due simply to capital accumulation or to both capital accumulation
and productivity growth. The point of
this debate was that the rapid economic
growth enjoyed by most Asian economies
would not be sustainable without improvements in productivity growth.
Marcel Timmer’s book, the result of
PhD research undertaken at the Eindhoven University of Technology, is a recent contribution to this literature. It
presents a comparative analysis of productivity performance in five Asian countries: China, Indonesia, South Korea,
India and Taiwan. The study measures
and explains comparative productivity
levels and growth within the manufacturing industries for the period 1963 to
1993. It differs from earlier studies in that
it focuses not only on productivity growth
but also on relative levels of productivity
across countries. The advantage of
Timmer’s approach is that it permits an
assessment of the productivity gap between countries, and whether the gap
has narrowed over time (i.e. the ‘catchup’ process), thus providing a richer
analysis of the industrialisation process.
Chapter 1 (the introduction) and chapter 2 (on the catch-up hypothesis) are
short, essentially setting the stage for
what follows. The next four chapters are
the core of the book, and focus on measurement and benchmarking of relative
productivity measures across countries.
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Chapters 3 and 4 present a sound methodology for international comparison of
productivity levels. The author is well
aware of the conceptual difficulties in
comparing levels across countries, and
overcomes these by benchmarking productivity levels with those in the US.
Chapter 5 compares aggregate productivity across countries, identifying periods of rapid catch-up (relative to the US)
and stagnation, while chapter 6 compares productivity levels of subsectors of
manufacturing across countries. Chapter 7 considers whether industry structure affects productivity levels, and
chapter 8 reviews, in light of the study’s
findings, the debate on the link between
approaches to industrial policy and productivity catch-up. All chapters are of an
easily digestible length, but some parts
are quite technical and not easily accessible to non-economists.
Several interesting findings deserve
special mention. First, the study finds
that increases in productivity levels are
an important part of the growth process
even in the early stages of industrialisa tion, and this growth is generally broadbased. Second, the productivity gap
between the East Asian countries and the
US has narrowed considerably over time,
but was still large in 1993. For example,
Timmer estimates that by 1993 Korea’s
productivity level was still less than half
that of the US. The productivity gap is
even larger for India, China and Indonesia. For example, value added per worker
in China and Indonesia was only around
5% of that in US manufacturing in 1993,
although there is significant variation
across sectors within each country. A
third finding is that the labour productivity gap was due partly to differences
in capital intensity across countries, but
primarily to differences in total factor
productivity (TFP) growth. According to
Timmer, Indonesia’s TFP level was only
261
about 18% of the US level in 1993. On the
basis of these results the author concludes that Indonesia and the other four
Asian economies still have significant
room for productivity catch-up with the
US.
One weakness of the book is that it
does not deal adequately with the link
between the different countries’ approaches to industrial policy and their
catch-up in productivity. This of course
remains a relevant policy issue today.
The author does note that for Korea and
Taiwan (two countries that had a more
‘interventionist’ industrial policy than
the others), the targeted sectors did not
perform any better in productivity terms
than the non-targeted sectors. He concludes that while selective policies such
as cheap credit may have stimulated
rapid resource accumulation, general
policy orientation—giving priority to
macroeconomic stability, openness to
trade, and provision of infrastructure and
general education—played a dominant
role in the broad-based productivity improvements of these two countries. In this
regard, an econometric approach separating the structural variables and the
various policy variables—trade policy,
subsidies, R&D incentives and expenditure on education—would have provided a rich insight into why some
countries experienced faster catch-up
than others.
In sum, this is a comprehensive and
technically sound study of productivity
levels and growth in five important Asian
countries. While parts of the book are
technical and may not be very accessible
to general readers, it will be an important reference for university courses on
the economics of development.
Kelly Bird
Partnership for Economic Growth
(USAID/Bappenas)/ANU
262
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J. Soedradjad Djiwandono (2001), Mengelola Bank Indonesia dalam Masa Krisis [Managing Bank Indonesia during the Economic Crisis], LP3ES, Jakarta, pp. xiii + 398.
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J. Soedradjad Djiwandono (2001), Bergulat dengan Krisis dan Pemulihan Ekonomi Indonesia [Struggling with Economic Crisis and Recovery in Indonesia], Sinar Harapan,
Jakarta, pp. xii + 321.
Since 1997 Indonesia has been mired in
economic crisis, and our fortunes have
risen or fallen in concert with the rupiah.
It has been a long wait, and we are
haunted by two questions—when will
we begin to emerge from this crisis, and
where will the real signs of economic recovery appear? It might be useful to
understand what has happened, particularly inside Indonesia’s central bank,
during these long years of gloom. Two
books by Soedradjad Djiwandono, former
governor of the central bank, are important sources for this purpose.
It would be no surprise if the first book
were considered a defence of Soedradjad
Djiwandono. It contains his personal
account of debates on various matters,
ranging from the sources of the crisis to
tight money policy, the permanent closure of 16 banks in November 1997, Bank
Indonesia liq uidity support (BLBI,
Bantuan Likwiditas Bank Indonesia)
and other issues related to the role of
Bank Indonesia from July 1997 to February 1998. In the introduction, Djiwandono admits that the book is far from
comprehensive and that he sees it as a
personal account rather than a rigorous
academic study. Nevertheless, it is most
useful as a supplement to the various
investigations of the crisis in Indonesia.
The author discusses what really
went on in Bank Indonesia during the
economic crisis and what the sources of
the crisis were. He outlines the initial
debate, centred on the link between currency depreciation and economic fundamentals. One view suggested that the
economy was basically as sound as it
had been before, while others argued
that a large depreciation must mean that
Indonesia’s economic fundamentals
were much less sound than was generally believed. Both positions identified
the major institutional problem of poor
governance or KKN (‘corruption, collusion and nepotism’) as the key to the
crisis. Djiwandono argues that the economic fundamentals were relatively
strong, but that Indonesia had a major
problem in the banking system; the
source of the crisis was a mixture of internal factors, including a weak banking system, and external factors such as
the financial panic in Thailand. This
argument seems sound, given that there
is no clear link between the crisis and
economic fundamentals such as GDP
growth, inflation and total factor productivity. The economic crisis of 1997–
98 was mainly to do with financial
markets, exchange rates, the problem of
short-term debt, capital mobility and
political disturbances. In addition, the
uniq ue eq uilibr ium Kr ugman-type
model cannot be said to apply in East
Asian countries other than Thailand.
Djiwandono also points out correctly
that the economic crisis cannot entirely
be explained by KKN. If this were the
trigger, why did it take until July 1997
for the economy to begin to unravel,
and why did China or Vietnam, which
were as corrupt as Indonesia, escape
the crisis?
The book tells the story behind the closing of 16 banks in November 1997, an
action that provoked a shower of criticism. Contrary to the popular argument
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that the disastrous effects of the closures
were due to the absence of deposit insurance, Djiwandono argues that the resulting bank runs were created by large
depositors. In other words, even if deposit
insurance for small depositors had been
in place, this would not have prevented
bank runs. Learning from this failure the
IMF, with the blessing of the Indonesian
government, subsequently provided a
blanket deposit guarantee. It is clear that
the IMF did not expect bank runs to result from the closures: as Djiwandono
points out, the Fund kept arguing that
the value of the 16 banks represented
only 3% of the total assets in the banking
system, and therefore the closures would
not affect the economy adversely. Unfortunately, history has shown otherwise:
the closures led to bank runs to which
the central bank responded by providing liquidity credit support (BLBI). It is
unfortunate that Djiwandono does not
explain in more detail to what extent the
bank runs were motivated by fear of the
collapse of banks and the loss of deposits, and to what extent by a desire to buy
foreign currency and speculate on the
rupiah. Since both motives are likely to
have been present, the provision of BLBI,
intended to prevent banks from collapsing, was (without sterilisation) in fact also
financing speculation against rupiah.
Another interesting story in the volume concerns interest rates during the
crisis. Djiwandono recounts that Bank
Indonesia was under pressure to reduce
liquidity and interest rates, and that other
ministers from ‘the real sector’, and
Soeharto, were in favour of reducing interest rates. He admits that at the time a
high interest rate would only have been
effective in defending the rupiah in the
short term. But he disagreed with the decision of Mar’ie Muhammad (former
Minister of Finance) to convert deposits
owned by state-owned companies into
SBI (Bank Indonesia Certificates), and to
263
stop routine expenditure for two weeks
because it had raised the interbank interest rate by more than 100%.
Although this is a personal rather than
an academic account of the role of Bank
Indonesia during the economic crisis, it
offers many useful insights into the
bank’s role, and into the story behind the
author’s dismissal from its governorship,
an event he considers a great personal
relief.
The second book is a selection of
Djiwandono’s articles and papers in the
media and in seminars. Like the first, it
discusses a wide range of issues that
bear on the relationship between the crisis and KKN, the exchange rate and
Bank Indonesia. It is interesting to read
Djiwandono’s response to the arguments advanced by Steve Hanke, the
Johns Hopkins University adacemic
who promoted to the Indonesian leadership the idea of a Currency Board System (CBS). Djiwandono argues that
foreign reserves were inadequate to support a CBS, and that the lack of a legal
framework and the tendency of the government to intervene in monetary policy
would make a CBS ineffective. This debate is fascinating, particularly if we relate it to current perspectives on the CBS
in relation to the economic crisis in Argentina. As Paul Krugman argues,
Argentina’s currency board allows no
flexibility in monetary policy, making it
difficult for policy makers to respond to
the crisis. Was it a blessing that Indonesia did not adopt a CBS? It remains a big
question.
Even more interesting is the untold political economy story behind the CBS.
D jiwa ndo no wonder s how Steve
Hanke’s name came into the picture and
why he came to Indonesia at the expense
of PT Astra International and under the
name of Simon Holland. As he says, it is
like a detective story (p. 79). Of course it
is dangerously heroic to conclude that
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264
the plan to adopt a CBS was solely driven
by political factors. However, in Indonesia, where political factors are so important in economic decision making, this
question remains of interest. Djiwandono
also recounts how he had to use polite
argument, speaking with Soeharto in a
‘Javanese way’, to voice his opposition
to the CBS idea, which the president supported. He explains his disagreement
with the idea in terms not of the limitations of the CBS system, but merely of the
conditions the government would have
to meet before adopting the CBS. He believed that a CBS could only be effective
Book Reviews
under the right circumstances, which
were not present when the idea was
raised.
Although not providing a comprehensive discussion of the economic crisis in
Indonesia, these two books are useful in
enriching our understanding of it. Some
of the topics covered, including tight
money policy, BLBI and the CBS, are indeed still subjects of debate. Perhaps these
books will stimulate further research on
them.
M. Chatib Basri
University of Indonesia