Macroeconomic Policies in Indonesia: Indonesia Economy since the Asian Financial Crisis of 1997 ed. by Anwar Nasution (review)

This edited book explores the key economic challenges Indonesia faced after its military-led authoritarianism was replaced with a multi-party democracy, and its state-led economy was replaced with a market-based one. After the fall of President Suharto in 1998, Indonesia undertook significant institutional reforms, characterized by a “messy” democracy, and since 2001, “big-bang” political and economic decentralization. The book argues that there are significant challenges in policy-making and sustaining much-needed reforms in the “new” Indonesia. Unlike the situation under Suharto’s regime, the decision-making process is substantially more complex today. There is no mutual relationship between the government and a single-party majority; economic policies are hence subject to constant political bargaining.

In addition, decentralization delegated and transferred many powers to local governments, particularly at the district level. Since 2001, local governments have been permitted to manage their own economic strategies to achieve better growth and prosperity for their population. Unfortunately, this increase in local powers is not matched by sufficient technical capacity within local governments to understand economic challenges and identify the necessary reforms. Against this backdrop, the book assesses the progress made in some of the reforms introduced since the fall of Suharto.

The book has ten independent chapters in addition to an introductory discussion. The ten chapters cover a broad range of economic issues in Indonesia, such as the monetary and financial sectors, fiscal reform, trade, manufacturing, democracy and decentralization. The first four chapters discuss the dynamics of Indonesia’s monetary policy and financial system since the end of the 1997–98 Asian Financial Crisis (AFC) — two of which were written by the editor, Anwar Nasution. It is likely that Nasution’s contributions stem from his deep involvement with Indonesia’s economic and financial management: he served as Senior Deputy Governor of the Central Bank from 1999 to 2004, and Chairman of the Audit Board of the Republic of Indonesia from 2004 to 2009.

With his first-hand experience, Nasution discusses how the central bank shifted from quantity rule to interest rate rule, and from a government-controlled financial system to a market-based one after the AFC. He warns against the existing use of the Taylor-rule — a guideline for interest rate manipulation — to direct monetary policy. This is because of the sensitivity of Indonesia’s primary industry to the uncertainties of international markets, and the dominance of foreign investors in the ownership of Indonesia’s sovereign bonds and Bank Indonesia’s certificates (p. 31). Nasution also examines the post-AFC bank restructuring programme. In Chapter 2, he emphasizes the need to strengthen Indonesia’s financial infrastructure through: adopting Basel core principles and standards; reducing insider trading; applying accounting standards; building financial sector supervisory authority; and establishing a financial system stability forum. However, this chapter could be improved by including a discussion on how financial reforms will address the public sector failures that resulted in the inefficiencies of many state-owned and regional development banks in Indonesia.

Chapters 5 (Brondolo, Silvani, Le Borgne and Bosch) and 6 (Mahi and Qibthiyyah) look at fiscal policy issues in Indonesia. In particular, the former reviews the progress and challenges in tax administration reform and fiscal adjustment, while the latter assesses the effectiveness of intergovernmental transfers. However, the use of old data limits the analytical strength of these two chapters, because there have been changes in tax policy since 2007. Additionally, the results in Chapter 6 on the impact of intergovernmental transfers on regional economic growth suffer from a serious reverse-causality issue.

Chapter 7 (Ing, Pangestu and Rahardja) analyses the rise in protectionism after the 2007–08 Global Financial Crisis. The authors argue that, despite the decrease in tariffs, non-tariff measures and behind-the-border restrictions have increasingly become more pressing trade-related issues (p. 236). The current political circumstances and decentralization of authority in the post-Suharto regime makes it...